What it means
Many Canadians who leave an employer pension plan move their savings into a locked-in account (a registered account where access to the money is restricted by pension law). When it is time to draw income, they convert the locked-in account into a life income fund, often called a LIF.
The fund can hold a range of investments, such as mutual funds, bonds and shares. The money continues to grow tax-deferred, and withdrawals are taxed as income in the year they are received.
Two limits apply every year. The minimum is based on the account holder's age and the balance at the start of the year, and it follows the same approach as other registered retirement income accounts.
The maximum is set by the pension law that applies, which may be federal or provincial, and it prevents the holder from spending too much too soon. The structure differs from a registered retirement income fund (RRIF) mainly because of the maximum.
A RRIF has no upper limit, whereas a LIF limits withdrawals because the money came from a pension meant to provide lifelong income. Rules differ between jurisdictions and are updated from time to time, including special provisions that allow additional withdrawals in cases of hardship or small balances.
People should confirm the current rules with their plan administrator or an adviser. Holders should also remember that withdrawals are taxable income and may be subject to withholding.
Spreading withdrawals evenly or timing them carefully can help manage the tax bill.
In practice
Real-world examples.
Example
A 66-year-old engineer leaves a long career with a company pension plan and transfers $600,000 into a LIF. He sets up monthly payments within the minimum and maximum, which gives him a steady income. He pays tax on each payment at his normal rate.
Example
A teacher retiring at 60 moves her locked-in savings into a LIF and holds a mix of bonds and dividend shares inside it. She takes only the minimum withdrawal in the first years because she has a part-time job. The remaining balance continues to grow without tax until it is withdrawn.
Example
A financial adviser explains to a couple that the maximum withdrawal is lower in the early years than in later ones. They plan to take the highest permitted amount each year to cover a large renovation. The adviser warns that this will shorten the life of the fund.
Formula
Calculation
Minimum withdrawal = Opening balance x Minimum percentage factor for age
Suppose a 70-year-old has a LIF balance of $400,000 on 1 January. The minimum factor for age 70 follows the formula 1 / (90 - age), which is 1 / 20 = 5.00%. The minimum is 400,000 x 0.05 = $20,000. If the applicable maximum percentage is an illustrative 8.0%, the maximum is 400,000 x 0.08 = $32,000, so the holder may withdraw anywhere between $20,000 and $32,000 that year. The range between minimum and maximum gives the holder flexibility. Taking the minimum keeps more money invested and deferring tax, while taking more of the maximum increases spending money now at the cost of a smaller balance later. The next year's minimum is then worked out again on the new opening balance.Case study
Seen in the real world.
Maple Ridge Advisory is an illustrative, fictional planning firm. It meets a client, Daniel, who has $450,000 in a LIF and wants to withdraw $45,000 a year. His age sets a maximum of about $36,000, so the request exceeds the limit by $9,000.
The firm explains the cap and builds a plan in which Daniel takes the maximum from the LIF and funds the gap of $9,000 from other savings. He also learns that the pension money is protected for later years. The story is invented, but it shows how the maximum constrains choices.
Six months later Daniel also asked about leaving money to his children. The firm explained that the balance remaining at death passes under the plan's beneficiary rules, and that the amount will be taxed as income unless it passes to a spouse. He chose to name his wife as beneficiary.
Watch out
Common mistakes.
- Treating a LIF like an ordinary retirement fund. It has a maximum withdrawal and other pension-law limits.
- Forgetting the minimum. If the minimum is not withdrawn, penalties and tax problems can arise.
- Assuming all provinces have the same rules. Maximum limits and special provisions differ by jurisdiction.
Questions
People also ask.
What is the difference between a LIF and a RRIF?
A LIF has a maximum annual withdrawal, while a RRIF has only a minimum.
Are LIF withdrawals taxable?
Yes, withdrawals are generally treated as taxable income in the year received.
Where does the money in a LIF come from?
It usually comes from a locked-in account, such as one holding money from an employer pension plan.
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