I work in health care and like most people in health care, I have a pension plan that cannot be accessed until age 55 (minimum). However, given that I plan to retire by the time I turn 30 that presents a bit of a problem. Fortunately there is a solution.
When I leave my employer I have a couple of options.
- Leave the money in the pension plan and receive a pension at age 55 (earliest, reduced).
- Take the money out and transfer it into a Locked in Retirement Account (LIRA) that can be accessed at age 55. The amount transferred to a LIRA will be the commuted value. In other words the present value needed to meet the pension obligation. In the low interest rate environment we are in now, the commuted value should be much higher than the contributed amount. This commuted value is calculated by the pension plan but, for the calculations, I will used my contributed amount.
To determine which option is best we need to math this up. At age 30 I will have contributed approximately $28,000 in the pension plan. Based on my pension statement this will give me a monthly pension of about $240 at age 65 in todays dollars. Using a 6% interest rate to account for inflation on $28,000 after 35 years will give me $228,000 at age 65. Using the 4% rule on $228,000 will give me a monthly income of $760. So the choice is clear I will be taking the money out of my pension and moving it into a LIRA.
By taking the money out of the pension plan, when I pass my estate will still have the entire principal balance of my pension. If I were to leave my money in the pension plan my estate gets nothing when I pass. One other very important component to taking money out of my pension is, I can transfer that amount out of the LIRA well before age 55. Let me explain.
As a regular retiree, 30% of your pension is likely evaporated due to taxes. An early retiree can do better. By transferring your pension to a LIRA we can strategically withdraw the LIRA before age 55
In British Columbia if you don’t have any other income you are able to withdraw up to $28,700 per year from your LIRA at any age before age 55. Here is the application to do this. You send this application to your bank that holds the LIRA and they release the funds. In order to access any amount of funds from the LIRA you need to make less than $38,267 per year. As an early retiree most of us on paper make less than this. With capital gains, qualified dividends and income from the TFSA some of us can make upwards of $75,000 a year tax free and appear to make under our personal exemption amount (federal $12,069 as of 2019) on paper. The idea is to withdraw the personal exemption amount of $12,069 from your LIRA every year until the LIRA balance is zero.
My pension amount of 28,000 at my planned retirement date of 30 is low but still benefits from this withdraw strategy. It would take me just under 3 years of withdrawing the personal exemption amount to bring this balance to zero tax free. No matter what age you retire, it’s best to get your LIRA balance to zero (tax free) before you receive your CPP and OAS. It’s best to do this in a strategic manner. So for example if your balance in the LIRA is $240,000 at age 45 (assuming no growth for simplicity of this example) then you would have 20 years to bring this balance to zero before CPP and OAS kicks in at 65. The personal exemption amount is 12,069 which goes into 240,000 about 20 times, perfect! So over the next 20 years take out $12,069 from your LIRA and by the time you are 65 the balance will be zero.
As you withdraw the money from the LIRA it’s best to put it into a qualified dividend paying ETF or TFSA if you have the room to avoid paying taxes on the growth.
I hope this article brought some value and showed you can withdraw from a LIRA before age 55 if you make under $38,267 per year on paper.