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What is a LIF? A Complete Guide to Life Income Funds in Canada
Money.ca / Money.ca
Updated: November 27, 2024
Key takeways
- A Life Income Fund (LIF) is a Canadian retirement option that provides lifelong income from locked-in pension funds, distinguishing it from other retirement vehicles like RRIFs
- LIFs have strict withdrawal rules, including minimum and maximum limits regulated by provincial laws, to ensure sustainable retirement income
- While LIFs offer investment flexibility and tax-deferred growth, they also come with restrictions on accessing large sums, making planning and understanding eligibility crucial
What is a Life Income Fund (LIF)?
A Life Income Fund (LIF) is a Canadian retirement account that’s designed to take your locked-in pension savings and turn them into a steady stream of income once you retire.
It’s usually funded by transferring money over from a Locked-In Retirement Account (LIRA) or a Locked-In Retirement Savings Plan (LRSP), but there are some pretty strict rules on how much you can pull out every year — this is all to make sure you don’t run out of cash too quickly.
So, how does it work?
When you retire, your pension money that was stashed in a LIRA or LRSP gets shifted into a LIF. From there, you start making annual withdrawals, but the government steps in to say, “Hey, slow down,” with both a minimum and maximum limit based on your age and what province you’re in. The idea here is to help you stretch that retirement money over your lifetime, so you don’t burn through it in the first few years of retirement.
LIFs are only fed by locked-in pension funds from a LIRA or LRSP, which is a big difference from something such as a Registered Retirement Income Fund (RRIF), where you’re moving money over from a Registered Retirement Savings Plan (RRSP).
Additionally, you can't simply add extra cash to a LIF as direct cash or transfer contributions aren't permitted.
LIF vs. RRIF: What’s the difference?
The big difference between a LIF and an RRIF comes down to where the funds originate. Now, let’s break it down further:
| LIF vs. RRIF | LIF | RRIF |
|---|---|---|
| Funding | Created from locked-in pension funds | Funded by RRSPs |
| Withdrawals |
Strict withdrawal limits (both minimum and maximum).
Designed to make your retirement income last longer by restricting large withdrawals |
More flexible withdrawal limits once minimum is met
Only a minimum withdrawal requirement each year. You’re free to withdraw more if you want |
| Tax impact: |
Withdrawals taxed as income
More predictable tax planning because of structured payouts |
Withdrawals taxed as income
Unlike LIFs, which have predictable withdrawals due to maximum limits, the tax burden in RRIFs may vary each year depending on the withdrawal amounts |
| Best for | Good for people with locked-in pension funds who need structured, long-term payouts | Ideal if you want more control and flexibility with your retirement income |
And remember, both LIFs and RRIFs come with taxable withdrawals, so a chat with a financial advisor can help you decide which makes the most sense for your personal retirement plan.
LIF withdrawal rules and maximum/minimum limits
When it comes to LIFs in Canada, both the Income Tax Act and provincial legislation set the ground rules for how much you can withdraw each year. There’s a minimum and maximum you need to stick to, and here’s a quick peek at how it works in a few provinces:
How to calculate LIF withdrawals (hypothetical example)
Here’s a super simple formula to figure out your minimum withdrawal percentage:
1 ÷ (90 – your age) = Minimum withdrawal percentage.
Let’s say you’re 65 years old, the formula would look like this:
- 1 ÷ (90 – 65) = 0.04 (or 4%)
So, if you’ve got $200,000 sitting in your LIF, the minimum withdrawal would be:
- $200,000 × 0.04 = $8,000.
That's the calculated minimum for the year.
Example of LIF withdrawal at age 71
At age 71, your minimum withdrawal percentage bumps up to 5.28%. So, if you’ve got $300,000 in your LIF, here’s what the numbers look like:
- $300,000 × 0.0528 = $15,840.
That’s the minimum you’d have to withdraw.
The maximum can reach 8.45%, or $25,365, giving you a range to plan your retirement income.
| LIF value | Minimum withdrawal (5.28%) | Maximum withdrawal (8.45%) |
|---|---|---|
| $300,000 | $15,840 | $25,365 |
For more details on LIF withdrawal percentages by age, you can check out the this table.3
Unlocking LIF funds: Can you get access?
Yes, in certain cases, you can unlock LIF funds early, but the rules vary by province. Here are a few examples where you might be able to unlock some cash:
Investment options within a LIF
When it comes to a Locked-In Fund, you actually have quite a bit of flexibility when choosing where to put your money. Here’s the lineup:
- Stocks (How to buy stocks)
- Bonds ( How to invest in bonds)
- Mutual Funds (How to invest in mutual funds)
- ETFs (Exchange-Traded Funds) (How to invest in ETFs)
So what’s great about these options?
Well, they let retirees shape their portfolios to match their own risk tolerance and financial goals. Whether you're more of a “slow and steady wins the race” kind of person or someone who likes a bit more action, there’s something here for you.
Strategies for growth
Do you want to grow your LIF without losing sleep over market dips?
Then you might want to consider mixing it up with a diversified portfolio — think of a balance between lower-risk bonds and some higher-yield ETFs. But don’t forget to review your portfolio regularly — life changes, markets change and so should your strategy.
Top monthly income funds in Canada
For those of you looking to maintain a steady stream of income from your LIF, here are a few popular picks that Canadians tend to gravitate toward:
- BMO Monthly Income Fund4
- RBC Monthly Income Fund5
- TD Monthly Income Fund6
These funds are designed to provide a consistent monthly income, which is crucial when you’re in the retirement phase and want predictable cash flow.
Planning for retirement income: LIF vs. other accounts
LIF vs LIRA
So, you’ve got a LIRA, and now you're staring down the next step — a Life Income Fund.
What’s the difference? Well, think of your LIRA as the “holding zone” for your pension funds. It just sits there, keeping things safe until you’re ready to retire.
But once you’re at that stage, you convert it into a LIF to start drawing some income. You can’t just take money out of a LIRA whenever you want (unfortunately).
But with a LIF, you can start enjoying the fruits of your labour (sort of – there are still rules, but we’ll get into that).
Combining LIF and RRIF accounts
Here’s where things get interesting. Lots of retirees mix their LIF with other accounts, like RRSPs or RRIFs. Why?
Well, because having a few different sources for retirement income gives you more flexibility.
Picture it like this: A LIF is your steady paycheque, but, if you need a bit more for a surprise expense (like that emergency trip to Florida in February), having an RRSP or RRIF lets you withdraw extra without breaking the bank — or the rules. It's all about providing flexibility, which is essential for effective retirement planning.
Calculating retirement income
Don’t just wing it with your retirement income; let’s get tactical about it.
A good LIF calculator7 is a handy tool to figure out how much income you can expect.
But why stop there?
Combining your LIF with investments like dividend-paying stocks or other income-generating funds can really supercharge your retirement plan. It’s like building yourself a financial fortress for those golden years, brick by brick.
Dividend stocks that should be on your radar
Speaking of dividend-paying stocks, here are a few of my go-tos for building that income stream:
- Royal Bank of Canada (RY)8: Classic choice with steady payouts
- Enbridge Inc. (ENB)9: This one’s like clockwork with those dividends
- Canadian Imperial Bank of Commerce (CM)10: Reliable and consistent
These are solid companies that have been paying dividends for years, so they’re a good bet if you’re looking to add some stability to your income plan.
Final thoughts
In short, a Life Income Fund (LIF) is your go-to when it’s time to start drawing from those locked-in pension funds. It offers a good balance of investment flexibility and tax-deferred growth, but keep in mind there are limits on withdrawals.
So, it’s super important to plan ahead to make sure you’re getting the most out of it without running into any nasty tax surprises.
And, if you really want to nail your retirement strategy, don’t rely on just one account. Diversifying with other retirement accounts and smart investment moves can give you the income stream you need to enjoy those post-work years without worry.
Are you feeling confident in your retirement planning? Start the discussion in the comments below.
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Noel Moffatt is a Canadian fintech expert with a passion for simplifying personal finance. Based in St. John’s, NL, he draws on his background in finance, SEO, and writing to deliver clear explanations and actionable advice. Noel is dedicated to equipping readers with the knowledge and tools they need to make informed financial decisions, striving to make personal finance more accessible and understandable through his in-depth articles and reviews.
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