As a financial advisor in Canada, you often help your clients move from saving for retirement to drawing steady income. This shift can feel complex for many households. A Life Income Fund (LIF) is central to that conversation when pension assets are involved.
In this article, Wealth Professional will discuss how a LIF is created, how payments work, and how it compares with pensions, annuities, and more. Plus, you'll find a curated list of the latest news stories on LIF at the bottom of this article.
A LIF is a specific type of Registered Retirement Income Fund (RRIF) that holds locked-in pension funds. It converts pension savings into ongoing retirement income, while still allowing investment growth.
When your clients retire or leave employment with pension savings, those assets might first move into a LIRA or other locked-in vehicle. By December 31 of the year they turn 71, they need to convert those locked-in assets into a LIF or a life annuity. They can also open a LIF earlier, if they have reached the early or normal retirement age in the governing pension rules.
Once a LIF is set up, your clients choose the investments within the qualifying list. They also decide when to start payments, within the allowed limits. Income can start in the year when the LIF is opened or by the end of the following year.
Each year, your clients must withdraw at least the minimum amount. They can also withdraw more, up to the maximum allowed that year. The minimum comes from federal income tax law. The maximum comes from pension legislation, which can be federal or provincial.
These limits are influenced by:
The maximum also depends on a reference rate known as the Canadian Socio-economic Information Management (CANSIM) rate. This rate is updated each year. Several provinces permit LIFs, including:
In Newfoundland and Labrador, there is an extra rule later in life. There, your clients must convert their LIF to a life annuity by the end of the year they turn 80. In other provinces, a LIF can continue beyond that age, as long as minimum and maximum rules are followed.
Watch this video for more on LIFs:
A LIF is one of several withdrawal options highlighted in a 2022 report on shifting Canada's workplace pensions toward better retirement income.
LIF payments follow the same minimum rules as Registered Retirement Income Funds (RRIFs). The minimum withdrawal is calculated by multiplying the account value at the start of the year by a prescribed factor.
Your clients can choose how frequently they receive this income. Choices include monthly, quarterly, semi-annual, or annual payments. The schedule does not change the minimum or maximum amount. It only affects how cash flow is spaced during the year.
If your clients withdraw only the minimum from a LIF, there is no withholding tax at source. If they take more than the minimum, the financial institution must withhold tax on the excess. That amount is remitted to the Canada Revenue Agency (CRA) and appears on the T4RIF slip.
Your clients must report the total LIF income on their T1 General Income Tax Return. The T4RIF slip also shows any tax withheld. As a financial advisor, you can help your clients learn how different withdrawal levels will affect their overall tax bill.
A LIF is closely tied to a pension, but it is not a pension plan itself. The original pension plan is where contributions and benefits were earned.
When your clients leave that plan, pension rules determine if funds can move to a Locked-In Retirement Account (LIRA) and later to a LIF. Once in the LIF, those funds are still subject to several pension style protections and limits.
Locked-in rules still apply. In many provinces, your clients cannot simply withdraw the full value at once. Minimum and maximum withdrawals aim to stretch income over the retirement period. This preserves the original goal of the pension.
Spousal protection is also important. If your client has a spouse or common law partner, that person usually must consent to the creation of a LIF. This is because LIF withdrawals can affect the value of any future death benefit.
On death, remaining LIF funds often go first to the spouse or common law partner. If there is none, the funds can pass to named beneficiaries or the estate, subject to legislation.
Do you know that six in ten Canadians worry about retirement income lasting through their golden years? Check out the linked article to find out more.
LIFs and RRIFs share a lot of features, but they serve different types of retirement assets. Knowing those differences helps you choose the right vehicle for your clients.
The source of funds is the first difference. A LIF holds locked-in pension assets that came from a workplace pension. These funds are meant only for retirement income and are bound by pension rules.
On the other hand, an RRIF holds registered savings that came from Registered Retirement Savings Plans (RRSPs) or other RRIFs. These funds reflect personal retirement savings, not pension entitlements.
Both accounts have minimum withdrawal rules based on age and starting balance. The minimums are identical, since LIFs and RRIFs use the same factors from federal income tax law. Your clients must begin withdrawals by the end of the year after they turn 71 in both cases.
LIFs and RRIFs allow a range of qualifying investments. Both provide tax deferral on growth and tax all withdrawals as income. However, only LIFs remain under pension legislation. That means spousal protections, locked-in rules and, in some provinces, required conversion to an annuity at later ages.
The maximum withdrawal is where LIFs differ. RRIFs have no set maximum. Your clients can take as much as they want, even the entire balance, although this can increase tax and longevity risk. LIFs, by contrast, impose a yearly maximum.
For your planning work, think of a LIF as a pension-based income fund with withdrawal limits. Think of a RRIF as a personal retirement income fund with more withdrawal freedom but fewer pension style protections.
Should retirees draw from their RRIFs earlier? Read this to find out.
It depends. Both have strengths and tradeoffs. For instance, a LIF keeps investment control in your client's hands. They can work with you to select and adjust holdings over time. This can suit clients who are comfortable with market risk and want the potential for growth.
Income from a LIF can change each year. Your clients must respect the minimum and maximum but can choose any amount within that band.
A life annuity works differently. Your client pays a lump sum to an insurer, often from pension or LIRA funds. In return, they receive guaranteed income that usually stays level for life, or for a defined period. Once payments start, they rarely change.
This gives stability but removes flexibility. Your clients cannot adjust payments later in response to market conditions or personal changes. For some, this is comforting. For others, especially those expecting changing needs, the rigidity is a drawback.
Estate considerations also differ. If your client dies with remaining funds in a LIF, the balance usually goes to a spouse or common law partner. Then it goes to the beneficiaries or the estate, subject to tax and legislation.
Many life annuities, unless they include guarantees or survivor options, stop paying at death. No remaining value passes to heirs.
In the end, a blend of both approaches works well. A base level of guaranteed annuity income can cover core expenses. A LIF can then provide flexible income on top, with some growth potential and estate value.
LIFs sit at the centre of retirement income planning for many Canadians with workplace pensions. For your clients, they can turn years of pension savings into flexible income, while still preserving many protections.
A LIF lets your clients keep pension funds invested in a tax-sheltered account, choose appropriate investments, and draw income within legislated limits. It also allows remaining assets to pass to spouses and beneficiaries, subject to applicable rules and tax.
When you bring LIF planning into your discussions, you support your clients in turning locked-in pension assets into dependable retirement income. With your guidance, a LIF can help your clients move confidently into their next chapter after work.
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