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How does a locked-in RRSP differ from a regular RRSP and how can I obtain more information about locked-in plans?

A one-stop-information source is not easy to obtain regarding locked-in RRSPs, perhaps because the rules vary from province to province and are also subject to amendments by Revenue Canada.

There are three key points relevant to this type of plan.

1. What exactly is a locked-in RRSP?

If you leave a company after two years of service and your pension funds are vested, you may be eligible (depending on the province you live in), to take a lump-sum value of the pension and transfer the funds to a locked-in retirement account, called a LIRA. The reason for this lies in the fact that the funds are pension monies and therefore, are covered by government regulations. When you are ready to retire (a move that must take place before the end of the year in which the holder turns 69), you must convert the LIRA to a Life Income Fund (LIF) or a life annuity. (Vesting: Your right to all or part of your employer's contributions to your pension plan.) The LIRA is a close cousin to an RRSP - it can hold the same type of investments - but it does differ on two accounts; a) you cannot make a direct contribution to the plan (other than the initial pension money transferred from your employer) b) there are restrictions on how the money can be withdrawn.

2. HOW does a LIRA work?

Until recently the rulings did not allow you to withdraw cash from your LIRA until you converted the account to a Life Income Fund (LIF) or a life annuity. That is changing among the provinces. For example, effective March 3, 2000, the Ministry of Finance for Ontario allows withdrawal of funds from pension plans and locked-in accounts in cases of shortened life expectancy, and, in some instances, for holders with small balances in their accounts. The new pension reforms in Ontario are a good example of the disparity in rulings across the country. With the new legislation, Ontario proposes to introduce a Locked-In Retirement Income Fund (LRIF) for conversion of funds to an income stream. Alberta, Saskatchewan and Manitoba already have LRIFs in place and British Columbia is developing regulations to provide for them.

3. When can you 'unlock' the locked-in funds, if you don't come under the new ruling exceptions?

In most provinces, you can transfer a LIRA to a LIF as early as age 55. LIFs are designed to act as a bridge between a locked-in RRSP and an annuity. Minimum and maximum annual payouts from a LIF are calculated based on the net asset value of the LIF at December 31st each year. No payout is required in the year the LIF is established. A LIF is very much like a Registered Retirement Income Fund (RRIF), from which a set minimum income must be withdrawn each year. But, in this case, there is also a maximum annual payout in place. Why? Both Revenue Canada and the pension regulators who set the maximum annual ceiling for these accounts create the limits to ensure that the holder maintains a lifetime income from the plan. For further information on locked-in accounts, click online to your respective provincial government site or ask your financial advisor or bank institution for the latest rulings