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What is a Life Income Fund?
LIF: Life Income Fund
A Life-Income Fund (LIF) is an investment made for retirement, in which locked-in funds are purchased and held until retirement age. It is a form of Registered Retirement Income Fund (RRIF) to provide income throughout retirement.
“Locked-in” funds are held from a prior employment pension, terminated employment plan, or plan membership prior to retirement. The funds are "locked-in in" that they are not available to be withdrawn in cash, until the fund owner reaches early or normal retirement age in their specific province.
When an account holder or annuitant reaches retirement age, locked-in funds can be transferred into a LIF from a Locked-In Retirement Account (LIRA). LIRA funds can also be transferred to a life annuity. Funds from an LIRA must be converted to a LIF and begin to be withdrawn by the end of the calendar year when the annuitant reaches 71 years of age.
Province Specific Requirements:
LIFs can be purchased by residents of the following provinces:
- Alberta
- British Columbia
- Manitoba
- New Brunswick
- Newfoundland and Labrador
- Nova Scotia
- Ontario
- Quebec
In Saskatchewan and Manitoba, the option of purchasing a Prescribed Retirement Income Fund (PRIF) is available to residents. Locked-in funds in locked-in retirement accounts under Saskatchewan legislation can be transferred into a PRIF. 50% of funds in a LIF under Manitoba legislation can be unlocked at the provincial early retirement age, at least 55 years old, and transferred to a prescribed PRIF. There is no maximum withdrawal amount on a PRIF, and the minimum withdrawal rules remain the same.
In Newfoundland and Labrador, funds in a LIF must be converted to a life annuity by the end of the calendar year when an annuitant reaches 80 years of age.
LIF Withdrawals
Minimums
Life Income Funds follow the same minimum withdrawal rules to that of any Registered Retirement Income Fund. Funds withdrawn from a LIF are considered income, and therefore are subject to tax at the annuitant’s marginal tax rate. The financial institution holding a LIF will issue a T4-RIF to the annuitant exhibiting the amount withdrawn. The age of a spouse cannot be used to determine LIF minimum payments.
Marginal Tax Rate
An annuitant’s marginal tax rate is the combined federal and provincial taxes paid on all sources of income at the end of the tax period. Any tax withheld, if applicable, will also be exhibited on a T4-RIF provided by the financial institution holding the LIF. This amount must be declared on a T1 General Income Tax Return in the calendar year that it is withdrawn.
Note: As LIF withdrawal amounts are added to gross earned income, it is possible that withdrawals can push an annuitant into a higher tax bracket depending on the size of the withdrawal.
LIF Withdrawal Rates
LIF Minimum Withdrawal
The minimum LIF withdrawal amount is calculated in the same way as that of a RRIF. This is done by multiplying the market value of funds within a LIF at the beginning of the calendar year by the prescribed factor based on an annuitant’s age at the time. The resulting withdrawal amount can be taken in payments monthly, quarterly, semi-annually, or in a lump sum if the minimum amount is equal to the LIF’s total value.
Prescribed factor:
The annuitant must be the age of the early retirement date stated in the province’s pension legislation in which the LIF is governed. Annuitants younger than the age of 70 will have a prescribed factor of 1 divided by 90 less the annuitant’s age.
Prescribed Factor (younger than 70) = 1/(90-age of annuitant)
Source: Canada Revenue Agency
LIF Withdrawal Rates
Pre-March 1986 rules apply to RRIFs that were set up prior to the year 1986 and were never amended.
A RRIF that has received only transfers from another qualifying RRIF and has not yet been amended:
- Rules passed before 1986 and never revised
- Rules passed after 1986 and before 1993
- After 1992 with funds or property transferred from another RRIF
OR
Withholding Tax:
If the minimum required amount is only withdrawn, no withholding tax will be applied to the income. Inversely, if more than the minimum amount is withdrawn, the financial institution holding the funds will withhold tax and submit it to the Canadian Revenue Agency on the annuitant’s behalf. This applicable withholding tax is declared in Box 28 of the annuitant’s T4 RIF.
LIF Maximums
Annual maximum withdrawal amounts are applied yearly. This maximum LIF withdrawal is based on three factors: the LIF’s market value on January 1st of the applicable year, a federal rate known as the Canadian Socio-Economic Information Management (CANSIM) rate, and the annuitant’s age in that year. CANSIM rates change annually at the discretion of the federal government.
2021 LIF Minimum and Maximum Withdrawal Rates
| Age as at:
Jan 1, 2021 |
Minimum Withdrawal | Maximum Withdrawal
ON, NB, SK NL, BC, AB |
Maximum Withdrawal
QC, MB, NS |
Maximum Withdrawal
Federal/PBSA |
|---|---|---|---|---|
| 50 | 2.50% | 6.27% | 6.10% | 3.92% |
| 51 | 2.56% | 6.31% | 6.10% | 3.95% |
| 52 | 2.63% | 6.35% | 6.10% | 3.99% |
| 53 | 2.70% | 6.40% | 6.10% | 4.03% |
| 54 | 2.78% | 6.45% | 6.10% | 4.07% |
| 55 | 2.86% | 6.51% | 6.40% | 4.11% |
| 56 | 2.94% | 6.57% | 6.50% | 4.16% |
| 57 | 3.03% | 6.63% | 6.50% | 4.21% |
| 58 | 3.13% | 6.70% | 6.60% | 4.27% |
| 59 | 3.23% | 6.77% | 6.70% | 4.33% |
| 60 | 3.33% | 6.85% | 6.70% | 4.40% |
| 61 | 3.45% | 6.94% | 6.80% | 4.47% |
| 62 | 3.57% | 7.04% | 6.90% | 4.55% |
| 63 | 3.70% | 7.14% | 7.00% | 4.64% |
| 64 | 3.85% | 7.26% | 7.10% | 4.74% |
| 65 | 4.00% | 7.38% | 7.20% | 4.85% |
| 66 | 4.17% | 7.52% | 7.30% | 4.97% |
| 67 | 4.35% | 7.67% | 7.40% | 5.11% |
| 68 | 4.55% | 7.83% | 7.60% | 5.26% |
| 69 | 4.76% | 8.02% | 7.70% | 5.44% |
| 70 | 5.00% | 8.22% | 7.90% | 5.63% |
| 71 | 5.28% | 8.45% | 8.10% | 5.85% |
| 72 | 5.40% | 8.71% | 8.30% | 6.11% |
| 73 | 5.53% | 9.00% | 8.50% | 6.41% |
| 74 | 5.67% | 9.34% | 8.80% | 6.76% |
| 75 | 5.82% | 9.71% | 9.10% | 7.17% |
| 76 | 5.98% | 10.15% | 9.40% | 7.64% |
| 77 | 6.17% | 10.66% | 9.80% | 8.19% |
| 78 | 6.36% | 11.25% | 10.30% | 8.83% |
| 79 | 6.58% | 11.96% | 10.80% | 9.58% |
| 80 | 6.82% | 12.82% | 11.50% | 10.48% |
| 81 | 7.08% | 13.87% | 12.10% | 11.59% |
| 82 | 7.38% | 15.19% | 12.90% | 12.97% |
| 83 | 7.71% | 16.90% | 13.80% | 14.74% |
| 84 | 8.08% | 19.19% | 14.80% | 17.11% |
| 85 | 8.51% | 22.40% | 16.00% | 20.42% |
| 86 | 8.99% | 27.23% | 17.30% | 25.40% |
| 87 | 9.55% | 35.29% | 18.90% | 33.69% |
| 88 | 10.21% | 51.46% | 20.00% | 50.26% |
| 89 | 10.99% | 100.00% | 20.00% | 100.00% |
| 90 | 11.92% | 100.00% | 20.00% | 100.00% |
| 91 | 13.06% | 100.00% | 20.00% | 100.00% |
| 92 | 14.49% | 100.00% | 20.00% | 100.00% |
| 93 | 16.34% | 100.00% | 20.00% | 100.00% |
| 94 | 18.79% | 100.00% | 20.00% | 100.00% |
| 95 | 20.00% | 100.00% | 20.00% | 100.00% |
Advantages and Disadvantages of Life-Income Funds
Advantages:
- A LIF is a registered product and investment earnings while within the LIF are tax sheltered. Therefore, capital gains taxes need not be claimed on the annuitant’s income tax. However, this means that capital losses may not be claimed to offset income tax while the funds are within a LIF.
- LIF funds are creditor protected. The LIF’s balance cannot be seized to pay debts owing, however, the minimum withdrawal amount can be seized when funds are transferred out of a LIF.
- Collection of income may be delayed until the year following an annuitant reaching 71 years of age. This allows more time for investment returns to compound in a tax-sheltered environment.
- Annuitant’s can select investments within a LIF, so long as the LIF minimum remains available.
- Some LIF funds may be unlocked under the following circumstances:
- Annuitant’s life expectancy is shortened due to terminal illness
- Annuitant becomes a non-resident of Canada
Disadvantages:
- Withdrawal limits restrict annuitants from accessing extra income whenever necessary
- A LIF cannot be started until the age of early retirement is reached under provincial pension legislation in which the funds are governed
- A LIF is governed by the same investment regulations as other registered vehicles, and strict rules are applied to the investment options that may be held within a LIF
Qualified Investments include the following:
- Cash
- Securities listed on a designated stock exchange (may exclude derivatives)
- Mutual funds, segregated funds, exchange-traded funds
- Corporate bonds
- Government bonds
Non-qualified investments for registered plans include the following:
- Investments traded on over-the-counter markets
- Private mortgages, syndicate mortgages, angel investments and other types of 3rd tier investments
- A non-arms-length transaction, such as debt owed to the annuitant, or shares within a company that the account holder has over 10% interest in.
Note: Qualifying investments, as well as prohibited investment guidelines are available on the Canadian Revenue Agency website. Registered plans may not hold many non-qualified investments that can be held in a non-registered account.
Rules of Life-Income Funds
- A LIF cannot be purchased until the age of at least early retirement under pension legislation within the province from which the pension funds were issued.
- LIF payments can begin to be received when an annuitant reaches the early retirement, or normal retirement age specified under the pension legislation within the province the LIF is governed. Payments must begin to be issued from a LIF in the year following an account holder reaching the age of 71 years.
- The age of an account holder’s spouse may not be used to calculate the minimum withdrawal amount.
- As LIF withdrawals could impact a future death benefit payment of a spouse, consent must be obtained from an account holder’s spouse before a LIF is set up. LIF payments are considered income, and therefore must be declared on an annuitant’s income tax. These payments are taxable at the annuitant’s marginal tax rate.
- Investments within a LIF follow the same rules as other registered vehicles, and only certain types of investments qualify.
- Annuitants must adhere to minimum and maximum withdrawal requirements.
How Do I Buy a Life Income Fund?
- If you are interested in exploring investment options that minimize risk and optimize reward, LifeAnnuities.com can help. We are an innovative financial products company that offers the public, through a local advisor, broad range of wealth management services and specialized products, including life income funds. If you complete the LIF Form an advisor will answer your questions and supply the information you want.