What Is Life Income Fund (LIF)?

Life income funds are a retirement income vehicle available in Canada. The Canadian government regulates various aspects of life income funds, including the amounts that can be withdrawn. These are specified annually through the Income Tax Act's stipulations for RRIFs. To purchase a LIF, you must be at least of early retirement age, as defined in the pension legislation. Furthermore, you must be at least of early retirement age or expected retirement date to begin receiving LIF payments, and you must begin receiving payments in the year after you turn 71. Some advantages of a LIF include tax-deferred growth of contributions, the ability to choose from a range of investments (as long as they qualify), and creditor protection for funds within a LIF. Many institutions in Canada offer life income funds.

Basics

In Canada, a life income fund (LIF) represents a registered retirement income fund (RRIF) designed to house locked-in pension funds and additional assets, ultimately providing retirement income. Unlike lump-sum withdrawals, a life income fund mandates owners to utilize it to sustain their retirement income throughout their lifetime. The annual withdrawal amounts for RRIFs, including LIFs, are determined by the Income Tax Act, specifying both minimum and maximum limits. The Income Tax Act's RRIF regulations factor in fund balances and annuity considerations.

Life Income Funds in the Canadian Financial Landscape

Canadian financial institutions extend life income funds, serving as an investment avenue for overseeing payouts from locked-in pension funds and diverse assets. Upon departing a company, pension assets, often termed locked-in assets, may be retained but remain inaccessible. While manageable in alternative investment channels, conversion to a life income fund becomes necessary when withdrawals are initiated.

Government-set formulas dictate life income fund payouts, a regulatory framework applicable to all RRIFs. Several provinces mandate life income fund assets to be invested in a life annuity. Withdrawals from LIFs are often permissible at any age in many provinces, provided they contribute to retirement income.

LIF investors initiating payouts must be mindful of defined minimum and maximum withdrawal limits outlined in the annual Income Tax Act, applicable to all RRIFs. The larger of the two formulas, both calculated as a percentage of total investments, determines the maximum RRIF/LIF withdrawal.

Issuing financial institutions are obligated to furnish an annual statement to LIF owners. Predicated on this statement, LIF owners must, at the start of each fiscal year, specify a withdrawal amount within a defined range, ensuring sustained funds for lifetime income. Permissible investments in a LIF encompass cash, mutual funds, ETFs, securities on designated exchanges, corporate bonds, and government bonds.

Life Income Fund Regulations

Outlined below are key regulations about a Life Income Fund:

• Compliance with RRIF minimum withdrawal regulations is mandatory for a LIF.
• Withdrawals are classified as income and subject to taxation at your marginal tax rate.
• The determination of minimum LIF payments cannot be based on your spouse's age.
• Early retirement age, as specified in pension legislation, is the minimum requirement for purchasing a LIF.
• Commencement of LIF payments necessitates reaching either early retirement age or the normal retirement date.
• Mandatory initiation of payments is required in the year following turning 71.
• Spousal consent is obligatory for LIF setup due to potential impacts on future death benefits.
• Limited types of investments are eligible for inclusion in a LIF.

Life Income Fund Pros and Cons

Exploring the merits and drawbacks of a Life Income Fund:

Advantages

• Tax-deferred growth of contributions within a LIF account.
• Flexibility for LIF owners to choose qualifying investments.
• Creditor protection for funds in a LIF, safeguarding against debt obligations.
• Continued tax-deferred growth of contributions until the year after turning 71.

Disadvantages

• Early retirement age is a prerequisite for initiating a LIF.
• Early retirement or normal retirement age requirement for receiving LIF payments.
• Maximum withdrawal limits may hinder access to additional income when needed.
• Limited eligibility for holding qualified investments in a LIF account.

Managing Life Income Funds in Canada

Various Canadian institutions provide life income funds to facilitate retirement distributions for investors. Here is a brief overview of companies offering these funds:

1. Sun Life Financial: Provides diverse LIF investment options, including insurance-guaranteed investment contracts, mutual funds, segregated fund contracts, and more.
2. Canada Life: Enables the conversion of registered pension plans, locked-in registered retirement savings plans, or locked-in retirement account assets. Supports payment withdrawals for retirement income.
3. Canadian Imperial Bank of Commerce (CIBC): Offers a LIF daily interest savings account, allowing investors to earn daily interest on their account investments while facilitating retirement distributions.

Conclusion

Life income funds are regulated retirement income vehicles in Canada, subject to government guidelines specified in the Income Tax Act. To initiate a LIF, one must meet early retirement age requirements, and payments must commence by the year following turning 71. Notably, advantages include tax-deferred growth and diverse investment options, while drawbacks encompass age-related restrictions and withdrawal limits. Various Canadian institutions, such as Sun Life Financial, Canada Life, and the Canadian Imperial Bank of Commerce, offer LIF options, each providing unique features to support efficient retirement distributions.