If pension money is locked-in, funds cannot be taken out of the pension plan or a Locked-In Retirement Account (LIRA) as a lump sum cash payment. Locked-in money can only be used to provide you and your spouse with retirement income. However, there are three exceptions to the locking-in rules:
Shortened Life Expectancy
- A pension plan or a LIRA may provide for the payment of a pension over a fixed term or as a lump sum if you have a considerably shortened life expectancy. Your condition must be certified by a duly qualified medical practitioner.
- A pension plan may make a lump sum payment in lieu of a pension if your pension is considered to be too small to administer on a practical basis. Your pension is too small if:
- the commuted value (a lump sum payable today equal to a future series of payments) of your pension under a defined benefit provision, or the total value of your defined contribution account, does not exceed 20% of the Year's Maximum Pensionable Earnings (YMPE); or
- your annual pension does not exceed 4% of the YMPE.
- A LIRA may provide for a lump sum payment if the total value of your locked-in money is too small to warrant being administered as a pension. Your pension is too small if the total amount of all your locked-in money from all sources does not exceed 20% of the Year's Maximum Pensionable Earnings (YMPE). In determining the amount of an individual’s total locked-in money, the LIRA administrator must include amounts in all LIRAs held by the individual, as well as any deferred pension entitlements the individual has in a registered pension plan. A deferred pension entitlement is created when a pension plan member terminates his or her membership in a pension plan, and does not transfer the pension entitlement out of the plan.
The YMPE is the maximum amount of annual earnings from employment on which Canada Pension Plan contributions (deductions) and benefits are calculated. The federal government adjusts the YMPE every year according to a formula based on average wage levels in Canada.
- A pension plan may provide for the payment of an amount equal to the commuted value of a benefit if you meet the specified non-residency eligibility requirements.
- A LIRA contract must provide for a lump sum payment if you meet the specified non-residency eligibility requirements.
- The specified non-residency eligibility requirements are:
- You must be a non-resident of Canada as determined for the purposes of the Income Tax Act (Canada) (ITA);
- You must have not resided in Canada for at least two consecutive years;
- You must provide the administrator or issuer of the contract with written evidence that the Canada Revenue Agency has determined that the person is a non-resident of Canada for the purposes of the ITA;
- You must complete and file with the administrator or issuer of the contract a certificate of non-residency in Form 4; and
- If you have a spouse, you must obtain the spouse’s consent to the withdrawal and waiver of entitlement in Form 5 and file a copy of the completed form with the administrator or issuer of the contract.
See the related document below for more information on unlocking pension money.