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What Are LIFs And LRIFs?  

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Not the end of the road, but we consider the retirement beginning of a new life where the rules change. Planning, especially when you lose substantial regular income, is imperative and must be meticulous.

What are LIFs and LRIFs

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Today we will talk about LFs, and LRIFs to help you hedge your retirement. 

LIFs (Life income funds) and LRIFs (Locked-in Retirement Income Funds) are the best ways to provide you with a regular income even after you retire. So, learn about these opportunities and keep reading as this article has everything you need to know.  

What Do You Mean by LIFs and LRIFs In Simple Language?  

LIF stands for Life Income Fund, whereas LRIF stands for Locked-in Retirement Income Fund. Both are types of RRIF (Registered Retirement Income Fund) and are special accounts primarily used for holding and investing all the assets. You get the pay-out at the time of retirement.  

These assets commonly include the locked-in pension funds available to you once you reach the retirement age set by the province you hold your pension.  

For example, for all the workers in the Ontario province, the minimum age to start a pension is 65 years (Retirement age).  

Let dig deeper into the LIFs and their various features and associated rules.  

S.NoFeatures and Rules of a LIF and LRIF 
1. You cannot contribute anything to your LIF account, as they specifically meant it for holding all your retirement benefits. 
2. The retirement benefits (pension entitlements) held by the LIFs and LRIFs are invested as per your direction in various investment classes, such as: 
1. Mutual funds 
2. Insurance GIC (a kind of accumulation annuities) 
3. Segregated funds (market-linked investments) 
4. Any other investment asset in which you are comfortable  
3. You cannot withdraw any amount before reaching your retirement age, but you can do so in case of terminal illness or become a non-resident of Canada. 
4. You cannot withdraw a lump sum amount from your LIF account. Instead, you can withdraw money annually in a specified range of maximum and minimum amounts every year. 
5. This minimum and the maximum amount of calculations boils down to a specified percentage specified by the Tax Act every year. 
6. This percentage gets changed every year and even varies from province to province. 
7. Some provinces (Quebec, Nova Scotia, Newfoundland, and Labrador) allow the retirees to withdraw an additional amount over and above their annual withdrawals. 
8. This additional withdrawal serves as your temporary income and meets all your ad Hoc money needs. 
9. The annual withdrawals made from your LIF account will serve as a regular stream of income for you after your retirement. 
10. If you pass away with some balance behind in your LIF or LIRF account, the balance gets paid to the beneficiary whom you have designated. 

How Does a Life Income Fund (LIF) and Locked-In Retirement Income Fund (LRIF) Work?  

How Life Income Fund (LIF) and Locked-In Retirement Income Fund (LRIF) Work
Source: Unsplash

In search of a better salary, growth, and other employment opportunities, or simply because you dislike visions, missions, and the working environment of your existing company, the professionals are no less than nomads and keep migrating from one company to another.  

While doing so, they also transfer their pension money* to any of: 

  • A Locked-in Retirement account (LIRA) 

or 

  • A Locked-In Registered Retirement Savings Plan (RRSP) 

* Note that you must transfer your pension money or entitlement to a locked-in pension account after doing such a migration. You cannot withdraw this money before the retirement age, subject to exceptions.

In a LIRA or locked-in RRSP, your pension money gets invested as per your directions and in investment assets you prefer. This invested pension money keeps on growing with the efflux of time, and the whole corpus becomes available once you reach the age of retirement, after which:  

  • You can convert your LIRA or Locked-in RRSP account to any of:  
    • Life Income Fund (LIF)  
    • Locked-in Retirement Income Fund (LRIF)  

Or  

  • You can buy a life annuity  

What Are the Major Differences Between LIF and LRIF?  

Both LIF and LRIF are types of registered retirement income funds (RRIF) and used to hold your pension entitlements. They are like each other but differ on the below-mentioned parameters:  

Requirement for Conversion to a Life Annuity  

  • In several Canadian provinces, the funds remaining in a LIF need to be converted to a life annuity as soon as you reach 80 years.  
  • You will be required to give effect to this conversion in the year in you turn 80  
  • However, there is no such requirement in an LRIF, and no matter what age you are, you will not be required to convert the amount remaining at your LRIF to a life annuity.  

Calculation of the Maximum Withdrawal  

  • From both LIF and LRIF, you can withdraw a defined amount of maximum withdrawal  
  • The computation of this maximum amount differs under both these accounts   

What Are the Advantages of LIFs And LRIFs?  

Advantages of LIFs And LRIFs
Source: Unsplash

Being a renowned option, it has several advantages, such as:  

  • Tax Sheltering: Both LIFs and LRIFs are tax-sheltered. You need to pay taxes only when you withdraw from these accounts during your retirement phase.  
  • The benefit of Deferment: If you want your retirement corpus to grow for some more time, you can delay your withdrawals up to 71. It means that you are not under a compulsion to withdraw money from your LIF/ RLIF as soon as you retire.  
  • Allows You to Select Your Investments: With LIFs and LRIFs, you get an option to invest all your retirement benefits in the investment plans, assets, and classes of your choice.  

What Are the Disadvantages of LIFs And LRIFs?  

There are several criticisms of LIFs and LRIFs, which are:  

  • No Lump sum Withdrawal: You cannot withdraw any lump sum amount from your LIF or LRIF account. The maximum and minimum withdrawals are based on percentages annually reviewed by the Tax act. You are compulsorily required to follow them.  
  • Risk of Market Volatility: You can control your investments, but there is always a risk of suffering from capital losses owing to market volatility and other manipulations. 
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