locked in retirement account | Financial Crooks

I’ve read various places that you need to prepare 3 scenarios for retirement income: you and your partner happily living a long time together, you living alone after your partner dies unexpectedly young, and your partner living alone after you die unexpectedly young. Most recently, I saw this advice again in the book “Your Retirement Income Blueprint” by Daryl Diamond. For several weeks, I refused to find the numbers and the details because frankly I thought we might be in trouble if one of us dies “early.” We think we’ll have enough retirement income to maintain the lifestyle we have now but I was not so sure one of us would have enough if the other was gone.

Check the Details of Any Work Pension Plans Very Carefully for What Happens After a Death

One of us works at a company that has gone through several major mergers over the past 30 years. The HR Department staff there have to be very flexible thinkers because there are at least 5 different types of pension plans the employees can be enrolled in depending who they worked for pre-merger. This allows us a glimpse into how different plans work when we receive the benefit update booklets.

How Does Your Defined Benefit Pension Plan Change If You Die?

DB Benefits If You Die While Retired

Many Defined Benefit pension plans greatly reduce their monthly payments if the contributor dies. The amount paid may drop to

60%,
50% or even
0% !

of the original amount. That can spell retirement income disaster if the bulk of the expected bill-paying, food-buying, dentist and doctor-expense carrying money was coming from one partner’s DB pension.

DB Benefits If You Die Before You’re Retired

Worse still, though, is what may happen if a person dies before they start to receive their DB pension. Read the details in this section very thoroughly! As someone who has unexpectedly lost 2 non-smoking, fit, good-lifestyle married friends long before 60, I know it can happen to anyone.

For example, in one of the work pensions that we can “eavesdrop” into, we saw that if the person dies before retirement, the spouse receives back only the contributions to the plan. That sounds ok until you realize they are receiving back NONE of the compounding and growth for the 25+ years that the person was enrolled in the pension plan. That lump-sum payment is no where near enough to buy an annuity to generate the same monthly income that the original DB pension promised.

Don’t assume anything. Check the details for your specific DB plan/s.

Can You Depend on Your DB Pension?

Whether or not one of the partners in a relationship dies unexpectedly young, you should also evaluate whether you would be ok if one or both DB pensions is substantially cut or lost. Many DB pension plans have had trouble making promised payouts due to bankruptcies and mismanagement and mis-investment of funds.

Do Defined Contribution, DC, Pensions Offer an Unexpected Safety Net?

Many Defined Contribution pension plans are run on a segregated investment plan basis. The employer and/or employee contributions are channeled into a third-party managed fund. For example, a large company may hire Sun Life or Morneau Shepell to manage the DC pension monies for its staff. In these cases, the DC contribution money and the investment growth it earns are held “in trust” for the employees.

DC Benefits If You Die Before You’re Retired

It is very important to read the details of any DC pensions you are contributing to. They can vary.

Many DC pensions simply assign the entire balance of the DC retirement account to the partner, if he/she has been designated the beneficiary, in the event of a death before retirement. The partner receives the contributions, both employee and vested employer contributions, and the income and growth those contributions have earned.

This can be significantly better, if the employee has been working at a company for a very long time, than what the partner would receive from a DB pension plan payout. This is one case where a DC pension plan may be better than a DB pension.

DC Benefits If You Die While Retired

At the time of retirement, employees usually must choose how to use their DC contributions and growth to create a retirement income. They often can buy an annuity or keep the investments in a type of locked-in retirement income fund like a RIF.

How they choose to wrap-up their DC pension will affect what the surviving partner will receive. If an annuity is purchased, for example, then the terms and conditions of the annuity would decide what the surviving partner gets, if anything.

Many annuities stop at the time the purchaser dies.
Others continue to pay benefits but at a greatly reduced rate, such as at 50% of the original rate.

If the funds are transferred over to a locked-in type of RIF, usually it simply changes ownership to the surviving partner.

Check though! Always dig out the paperwork and read it. You don’t need to have to figure this stuff out at the same time that you are reeling from the shocking loss of your partner.

Can You Depend on Your DC Pension?

It appears that many DC pensions are at least as safe, or actually safer, if a company goes bankrupt than most DB pensions. Since most DC pensions are held by a third party in trust they are out of the reach of creditors and of desperate executives trying to keep a company afloat by “borrowing the surplus” from pension accounts.

What Will Happen to Your Personal Retirement Income When One Partner Dies?

In the second section, we’ll look at what may happen to other sources of retirement income such as RRSPs, RRIFs, TFSAs, and annuities if one partner dies.

What Will Happen to Your Government Retirement Income When One Partner Dies?

In the third section, we’ll look at what may happen to other sources of retirement income such as the CPP, OAS and GIS if one partner dies.

Related Reading

You Think You’re Fine for Retirement But What Happens If Your Partner Dies: Will You Still Have Enough Income? Part 2: Personal Savings (RRSP, RRIF, TFSA, Annuity) Retirement Income in Retirement
You Think You’re Fine for Retirement But What Happens If Your Partner Dies: Will You Still Have Enough Income? Part 3: Government Income (OAS, GIS, CPP) In Retirement

Join In
Have you done the math and read the paperwork to find out what the retirement income will be for you and your partner together, and each of you alone in retirement? Was it a sobering, frightening exercise to look at the survivor’s plan? Please share your experiences with a comment.

When you look at a list of registered accounts when setting up a new account at a discount brokerage you’ll see a long list of acronyms, including RRSP, RRIF, TFSA, RESP, LIF and LIRA. What exactly is a Locked In Retirement Account or LIRA?

What Is a LIRA and What Investments Can I Hold In It?

A LIRA is a type of pension investment account. It’s like a RRSP.

Your LIRA can be invested in

a daily interest cash account,
GICs,
mutual funds,
ETFs,
stocks,
bonds,
and other approved investments.

You may get to choose what your LIRA is invested in, or you may only be able to choose from a list of approved investments. Usually you are in control of your investment choices.

How Does Someone Get a LIRA?

One common way to get a LIRA is to leave a job that had a defined benefit pension plan. When you leave, you may be given the option to open a LIRA with an amount of money set by your employer to replace the defined benefit pension you would otherwise have received from the employer when you reached retirement age. The money in the LIRA might be entirely from your employer’s contributions to your pension, entirely from your contributions to your pension, or from a combination of both.

Another common way to get a LIRA is to retire from a company where you had a defined contribution pension plan. Often upon retirement, the funds will be transferred into a LIRA.

You will have to help set up the LIRA at a financial institution like a bank and you will have to sign papers agreeing to the terms of the LIRA before any funds will be transferred into the LIRA.

The financial institution will administer the LIRA according to the terms and rules set for LIRAs in the appropriate jurisdiction. For example, you might agree to a LIRA governed by the terms and rules set for LIRAs in the province of Alberta, or you might agree to a LIRA governed by the rules set by the Canadian federal government.

The governing jurisdiction stays with the LIRA even if you move. For example, you might agree to a LIRA governed by the rules in Alberta. Then, even if you move to Newfoundland and transfer the LIRA to a credit union in Newfoundland, you will still have to follow the Alberta LIRA rules.

The Rules for LIRAs Differ Depending on Which Government Controls the Plan

It’s important to know what government sets the rules that control your LIRA. The rules controlling the locked in retirement account can vary significantly from province to province. There are also some LIRAs that must follow rules set by the federal government.

To make it worse, the rules change periodically. When I first got my LIRA there was no way to get at the cash, even to move it to another RRSP, until age 60. Now, I can move some of the cash at age 50 providing the LIRA is only a certain size or smaller.

How Do I Know Which Government Controls my LIRA?

When you sign off on your severance package when you end your employment you will be given some papers about your LIRA. One of them should tell you which province, territory or government is controlling your plan.

Don’t assume you know which government is in control. You may be working in, say, Ontario when you finish employment with that business. Your LIRA, however, might be controlled by another province if your employer has its head office in another place like Alberta. Or your business might fall under Federal jurisdiction, like an airline, and your LIRA might be controlled by the Federal government. The only way to know for sure is to check the details about your personal locked-in retirement account.

Can I Add New Contributions to my LIRA?

Generally, no.

There are some quirks where you can sometimes combine 2 or more LIRAs that are governed by the same jurisdiction.

This is one of the problems with small LIRAs. Because you cannot contribute additional funds it may make certain investing options, such as certain types of self-directed investing, prohibitively expensive.

Can Creditors Seize My LIRA?

Generally, no. In most circumstances, creditors can not get at the assets in your LIRA to pay your debts. Once you start receiving income from your LIRA in retirement, however, they can seize that income.

Can I Use My LIRA as Collateral for a Loan?

No. Because creditors cannot seize your LIRA assets if you default on your loan, they will not accept a LIRA as collateral for a loan.