Yes, it is possible to use the funds from a life income fund to purchase an annuity in Canada. However, there are some important considerations to keep in mind when making this decision.
How Does a LIF Work?
First, it’s important to understand what a life income fund (LIF) is. A LIF is a type of registered account created to provide retirement income for individuals who have retired and have accumulated a certain amount of funds in their retirement savings plan (RRSP) or registered pension plan (RPP). The purpose of a LIF is to help individuals manage their retirement savings by providing them with a regular stream of income throughout their lifetime.
LIFs are similar to registered retirement income funds (RRIFs), but with some key differences. For example, LIFs have restrictions on the amount of income that can be withdrawn each year, while RRIFs do not. Additionally, LIFs require individuals to convert their retirement savings into an annuity or another income stream by a certain age (depends on the province).
There is also a minimum and maximum amount that you are allowed by the CRA to withdraw from a LIF account every year. These amounts are set and controlled by the Government of Canada and provincial governments.
Basically, a life income fund is designed to provide you with lifetime income. This is mainly because the funds have a portion of previous employer contributions that were designated specifically for retirement income. As a result, the Government has put restrictions in place to help ensure that these funds last in your retirement years (hence the minimum and maximum withdrawal limits).
Purchasing an Annuity with a LIF
When it comes to using funds from a LIF to purchase an annuity, there are different options and considerations to take into account.
For one, if you purchase an annuity using funds from a LIF, the income from the annuity is not subject to any minimum or maximum payment amounts that were required by the Government with the original plan.
You have the option of purchasing an immediate life annuity (single life or joint life) with the money from a life income fund. An immediate life annuity is an annuity that begins paying out immediately after it is purchased (once the funds are received by the insurance company). The amount of the annuity payments is determined by a number of factors, including the amount of the initial investment, the age of the annuitant, the prevailing interest rates and other factors.
Another option is to use the funds to purchase a deferred life annuity. A deferred life annuity is an annuity that does not begin paying out until a later date. The maximum amount of time that you can delay taking income from an annuity is one year from the purchase date of the annuity. After one year, you must start drawing income from the annuity if it was purchased with funds from a LIF. The advantage of a deferred annuity is that it allows the funds to continue to grow tax-free until the annuity payments begin and will result in a slightly higher annuity payment.
Advantages of Purchasing an Annuity
The main advantage of purchasing an annuity is that it provides a guaranteed income stream for life. This can be particularly beneficial for individuals who are concerned about outliving their retirement savings.
Another advantage that an annuity provides is protection against market volatility as the income payments are not affected by changes in the stock market or interest rates. This removes the stress and worry of fluctuations with your investments. Investing in the stocks and bonds can be very unpredictable, especially in the current environment that we are in with rising interest rates, geopolitics, COVID, supply chain issues, inflation, etc.
In summary, it is possible to use the funds from a life income fund to purchase an annuity in Canada. You are able to purchase either a single or joint life annuity with a maximum deferral period of one year. There are pros and cons to consider when making this decision and it’s important to carefully evaluate all of the options before making a decision.
With the help of a financial advisor, individuals can make an informed decision that will provide them with the retirement income they need to live comfortably in their golden years.
Please reach out to us at Life Annuites.com to discuss your annuity options further. We can also run customized quotes from the top life insurance companies in Canada for you at no cost.