Life Income Fund (LIF): Definition and How Withdrawals Work

What Does Life Income Fund Mean?

A life income fund (LIF) is a type of registered retirement income fund (RRIF) offered in Canada that can be used to hold locked-in pension funds as well as other assets for an eventual payout as retirement income.

A life income fund cannot be withdrawn in a lump sum. Owners must use the fund in a manner that supports retirement income for their lifetime. Each year's Income Tax Act specifies the minimum and maximum withdrawal amounts for RRIFs, which encompasses LIFs.

The Income Tax Act’s RRIF stipulations take into consideration fund balances and an annuity factor.

Understanding Life Income Fund

Life income funds are offered by Canadian financial institutions. They provide individuals with an investment vehicle for managing the payouts from locked-in pension funds and other assets.

In many cases, pension assets may be held but not accessible if an employee leaves a firm. These assets, usually called locked-in assets, can be managed in other investment vehicles but may require conversion to a life income fund when the owner is ready to begin taking withdrawals.

Life income fund payouts are determined by a government formula that applies to all types of RRIFs. Most provinces in Canada require that life income fund assets be invested in a life annuity. In many provinces, LIF withdrawals can begin at any age as long as the income is used for retirement income.

Once an investor begins taking LIF payouts they must monitor the minimum and maximum amounts that can be withdrawn. These amounts are disclosed in the annual Income Tax Act, which provides stipulations pertaining to all RRIFs. The maximum RRIF/LIF withdrawal is the larger of two formulas, both defined as a percentage of the total investments.

The financial institution from which the LIF is issued must provide an annual statement to the LIF owner.

Based on the annual statement, the LIF owner must specify at the beginning of each fiscal year the amount of income they would like to withdraw. This must be within a defined range to ensure the account holds enough funds to provide lifetime income for the LIF owner.

Life Income Fund (LIF) Rules

Here are some general rules regarding a LIF:

• A life income fund abides by RRIF minimum withdrawal rules
• Withdrawals are considered income and are taxed at your marginal tax rate
• You can't use your spouse's age to determine minimum LIF payments
• You must be at least of early retirement age (specified in the pension legislation) to purchase a LIF
• You must be at least of early retirement age or normal retirement date to begin receiving LIF payments
• You must begin receiving payments in the year after you turn 71
• If you have a spouse, you must obtain their consent before setting up a LIF as withdrawals could impact future death benefits
• Only certain types of investments qualify in a LIF

Advantages and Disadvantages of a Life Income Fund (LIF)

Setting up a LIF has several advantages:

• Like other registered products, contributions grow tax-deferred within a LIF
• LIF owners can choose their own investments (as long as the investments qualify)
• Funds within a LIF are creditor-protected and can't be seized to pay off debt obligations
• Contributions can grow tax-deferred until the year after you turn 71

Of course, there also disadvantages to setting up a LIF. They include:

• A minimum age requirement (early retirement age) before being able to start a LIF
• A minimum age requirement (early retirement or normal retirement age) before being able to receive LIF payments
• Maximum withdrawal limits prevent you from accessing more income when you need it
• Only qualified investments can be held in a LIF account

Life Income Fund Management

Life income funds are offered by many institutions in Canada to support retirement distributions for investors. Below is a list of companies offering life income funds with some details on each company’s product.

Sun Life Financial: Offers investors multiple options for LIF investing including insurance guaranteed investment contracts, mutual funds, segregated fund contracts, and more.

Canada Life: Allows for conversion of a registered pension plan, locked-in registered retirement savings plan, or locked-in retirement account assets. Facilitates payment withdrawals for retirement income.

Canadian Imperial Bank of Commerce: The Canadian Imperial Bank of Commerce offers a LIF daily interest savings account. Helps to facilitate retirement distributions. Allows investors to earn daily interest on their account investments.

Life Income Fund FAQs

At What Age Can You Withdraw Money From a LIF?

You can withdraw money at 55 years old. No withdrawals from a LIF are permitted before age 55.

Is LIF Income Taxable?

Yes. LIF income is taxable and must be added to your annual income. If the withdrawal is higher than the annual minimum withdrawal, taxes are withheld on the excess amount.

What Happens to a LIF When You Die?

Upon death, the balance of your LIF is paid to your spouse. If your spouse denies payment or if a spouse is absent, it is paid to your heirs.