What’s better, a LIRA or an enhanced pension?

Q. I plan on retiring in the next year. I will have BC Municipal Pension Plan income as well as about $400,000 dollars in my Special Agreements (SA) account. Just to clarify, an SA is a unique feature of BC pensions. The contributions can be transferred to a locked-in retirement vehicle or used to increase your lifetime monthly pension—you choose. I have been employed with the same company for 32 years. So when I retire, I have to make one of these two choices with my SA—leave the money in the pension and receive it added on to my monthly pension OR put the entire amount into a locked-in registered retirement fund (LIRA). I am not sure what the benefits of each would be, and which I should do. I do like the idea of putting it into a locked-in fund, separate from my monthly pension income so that whatever is remaining when I die, will go to my children. Any advice you could give would be much appreciated.

— Thank you, Craig

A. You’re in a good spot Craig, and you’re facing the million dollar question.

“Take a base pension plus $400,000 Locked-in Retirement Account (LIRA) OR use the $400,000 to purchase an enhanced lifetime pension?”

To really answer this question you’ll need to know what the monthly pension will be with and without the enhanced amount. Then you can do some comparisons.

You don’t provide the numbers so I can’t do the comparisons, but what other reasons are there for taking one over the other?

An advantage of enhancing your pension is that you can match your lifestyle, spending, and cost of coming to the aid of your children, to your enhanced pension income. You’ll always have enough money, no worries about the markets, and you won’t run out.

If you ever need to borrow money in retirement or co-sign for your children, you’ll have a higher income to borrow against. Generally, banks lend against income, not assets.

The disadvantage of enhancing your pension, as you point out, is that once you stop (die) the pension stops (assuming you are not married) and this leaves nothing for your children. This is why you are thinking about taking the $400,000 which is a good reason.

Other common reasons people would take the $400,000 LIRA are:

1. They think they can earn more relative to the pension. Maybe, but you are giving up lifetime guarantees to try. When you get the enhanced information you will be able to determine the rate of return needed to match your pension.

2. A shortened life expectancy.

The other thing to consider is that a Life Income Fund (LIF) has withdrawal restrictions. You may not be able to take/withdraw as much as you want/need in a given year.

Is the main reason to leave money to your children? What if you took the enhanced portion and used some of that income to purchase a life insurance policy?

The way you describe your situation, I am guessing you’ll have a home, some TFSA money, and possibly life insurance to leave to your children? Would you consider that to be enough?

Craig, as I mentioned at the beginning, you’re in a good spot. When you find out what the enhanced pension is, I’d be curious to know if the monthly pension is more money than you need. If it is, then I’d next want to know how you could best use that surplus to assist your children when needed.

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Allan Norman is a Certified Financial Planner and Chartered Investment Manager with Atlantic Financial Inc.

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc. and can be reached at alnorman@atlantisfinancial.ca



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