We’ve been taking a good look at accounts designed with retirement in mind. First, we reviewed RRSPs (the most well-known savings account that helps Canadians save money for retirement), followed by RRIFs (where all that money you saved eventually goes to give you income in retirement). We recently featured Locked-In Retirement Accounts (LIRAs), an account for your employer pension if you leave your company or end up laid off. If you’re wondering whether LIRAs operate in a similar way as this RRSP-to-RIFF pipeline, you’re in luck — they do! Introducing Life Income Funds, or LIFs.
What is a Life Income Fund (LIF)?
It’s not uncommon these days to hold several positions at a variety of companies over the course of a career. Pivoting career paths, taking on contract work, and hopping between jobs has become totally normalized. That said, Statistics Canada reports that active membership in registered pension plans in Canada surpassed 6.4 million in 2018.
Fortunate enough to have a job that offers a pension? When/if you leave your company or end up laid off, your employer pension is transferred to a LIRA. These accounts can also go by Locked-In Retirement Savings Plans (LRSP). If you end up staying at your job until retirement or never had an employer pension, then you’ll likely never have a LIRA. (That said, you’re going to want to open a TFSA or RRSP to save for retirement!)
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By design, LIRAs keep your pension safe and secure so you’ll have income for your post-retirement life. This could obviously add up to be a very long time. As a result, the use of the phrase “locked-in” really means locked-in. As in you cannot withdraw money from your LIRA. There are, however, very specific circumstances (eg. high medical expenses or you’re facing eviction) where you can.
In the lead up to retirement, your LIRA must be converted into a Life Income Fund (LIF). This is a registered account through which you’ll receive your pension funds as retirement income. You cannot contribute to it.
Note: Some jurisdictions call LIFs Locked-In Retirement Income Fund (LRIF).
You can also convert your LIRA into a life annuity. This is another financial product that also provides you with a guaranteed regular income.
Provincial or federal legislation governs pensions. Determining the jurisdiction of your pension comes down to the province where you were working when you left your job. Here are a few basic points on some of the provincial differences when it comes to Life Income Funds:
- LIFs are available in all provinces except Saskatchewan and Prince Edward Island.
- In Saskatchewan, you can purchase a Prescribed Registered Retirement Income Fund (PRRIF) — another vehicle for income in retirement. This is also an option in Manitoba.
Live in Newfoundland and Labrador? You are required to convert your LIF to a life annuity by the end of the year you turn 80.
How does a Life Income Fund work?
While conversion of a LIRA to a LIF will typically happen when you’re getting close to the standard retirement age — generally speaking, at age 55 — there is a deadline. In fact, it’s the same deadline that you’ll have with turning an RRSP into an RRIF: no later than December 31st of the year you turn 71.
Once this has happened, you’ll be able to use the established formulas to figure out your payments. You can also start investing the money in your account, in bonds, GICs, mutual funds, stocks, ETFs, etc. You’re in the driver’s seat!
LIF vs RRIF: Are there differences?
RRSPs get converted into RRIFs, turning all those savings you’ve accumulated into retirement income. The conversion of a LIRA into a LIF is essentially the exact same thing. RRSPs and LIRAs focus on accumulation; RRIFs and LIFs focus on income.
Both RRIFs and LIFs are tax-sheltered until your money withdrawn as income and can hold a variety of qualified investments (mutual funds, stocks listed on a designated stock exchange, government and corporate bonds, GICs, etc). As a result, you can invest your funds in a way that works for you, while the account continues growing tax-free.
A significant difference between the RRIF and the LIF has to do with withdrawals. With RRIFs, you’re restricted by a minimum withdrawal amount per year — i.e. depending on your age, you must withdraw a certain percentage per year (learn more in our RIFF guide). LIFs, however, also have a maximum withdrawal rate, which we’ll explain further down, designed to make sure you’ll have the ensuing income for the rest of your life.
How do Life Income Fund payments work?
Now that your pension funds are in a LIF, you can start receiving payments. Keep in mind, there is no minimum payment requirement in the first year of your LIF. As mentioned above, however, there is a maximum annual withdrawal amount. As long as you’re within the minimum, payments can be monthly, quarterly, semi-annual, or lump sum.
LIF Minimums + Maximums
The formula for calculating a minimum LIF payment is the exact same method as RRIF payments.
If you’re under 71 at the beginning of the year, this formula is 1÷(90 – your current age).
For those 71 and older, the minimum withdrawal is based on a percentage of your LIF assets. These percentages were established by the government, and increase with your age.
LIF withdrawal schedule
Age / Minimum amount
71 – 5.28%
72 – 5.40%
73 – 5.53%
74 – 5.67%
75 – 5.82%
76 – 5.98%
77 – 6.17%
78 – 6.36%
79 – 6.58%
80 – 6.82%
81 – 7.08%
82 – 7.38%
83 – 7.71%
84 – 8.08%
85 – 8.51%
86 – 8.99%
87 – 9.55%
88 – 10.21%
89 – 10.99%
90 – 11.92%
91 – 13.06%
92 – 14.49%
93 – 16.34%
94 – 18.79%
95 & over – 20.00%
FYI: You can’t use a spouse’s age when making LIF calculations.
The maximum varies between each jurisdiction. According to some provincial and also federal legislation, the percentage is based on age, the LIF’s market value, and a set interest rate factor called the CANSIM rate. Some maximum amounts can vary, because this rate is set annually — every November.
Can you withdraw money from a LIF?
Life Income Funds are locked-in accounts, keeping the money inside secure while it’s invested and used as retirement income. That said, there are some circumstances where, according to provincial or federal pension legislation, you can unlock your account.
Pensions that are under Alberta, Manitoba, Ontario, New Brunswick, or federal jurisdiction all allow a one-time lump sum withdrawal. You can get this either in (taxable) cash or as an (untaxed) transfer to an RRSP or RRIF. If your pension is under Quebec, Nova Scotia, or Newfoundland legislation, you can get an annual withdrawal (i.e. “temporary income”) on top of the minimum or maximum payments.
Get additional details on these province-specific rules here.
As we explained in our article about LIRAs, there are very specific situations where you can apply to unlock your account. The same thing applies to Life Income Funds. Broadly, these situations include:
- Financial hardship
- Shortened life expectancy
- Small account balance (ages 55+)
Get further specifics here.
What happens to a Life Income Fund when you die?
In many cases, your beneficiary will be your spouse. Want to name someone else? Your spouse has to sign a waiver giving up their right to these funds.
If you don’t have a spouse, you can simply name another beneficiary of your choosing. Qualified beneficiaries (spouse, common-law partner, or financially dependent children/grandchildren) will likely have to pay taxes at this point vs. on your final tax return. If your LIF is under Ontario or Quebec jurisdiction, funds can be transferred (tax-free) to the RRSP or RRIF of your spouse. Under federal LIFs, funds must be kept locked in an RRSP or LIF in your spouse’s name.
Advantages and disadvantages of Life Income Funds
The best aspects of Life Income Funds are actually two-fold. For starters, they’re tax-sheltered. Second, you can hold a variety of investments in them. Your money grows in a safe place, and you’re fully in charge of any investment decisions!
Other benefits to LIFs?
- They offer a degree of flexibility if you need to unlock your account
- You don’t have to immediately start collecting income from your converted LIF. Your investments have a whole extra year (from your 71st to 72nd birthday) to grow while tax sheltered.
Disadvantages? LIFs are still registered accounts. Despite some degree of flexibility, there are specific guidelines you need to follow regarding the types of investments you can hold. Finally, with a maximum withdrawal limit, you might not be able to access much-needed extra income.