When you leave an employer, the funds in your pension plan cannot be withdrawn based on provincial and federal pension regulations. Some of the options you may have for your retirement savings in a pension plan are transferring the funds to your new employer’s pension plan, purchasing an annuity, or transferring the money into a locked-in retirement account, also known as a LIRA. A locked-in retirement account provides income in retirement. When you get to the qualifying age –– which may differ across provinces, you can withdraw money from your locked-in retirement account. One way to collect funds from a locked-in retirement account is by converting it into a Life Income Fund, commonly referred to as a LIF.
A Life Income Fund is a registered retirement income fund that provides regular retirement income for account holders who have moved their pension funds into it. A LIF has tax benefits similar to a registered retirement savings plan (RRSP). However, one major difference is that you cannot make contributions into a LIF. Instead, the funds in your locked-in retirement account are transferred into it.
Most financial institutions across all provinces can set up a life income fund for you. Once you decide on which bank, credit union, trust, or insurance company you want to set up your LIF through, you would need to inquire about the details of the account. You do not necessarily need to sell off your investment assets in your LIRA before you convert to a LIF; your investment assets can be moved over to your new LIF account as is.
When you decide to convert your locked-in retirement account to a life income fund, you may be able to unlock some of the money, up to 50 percent depending on your age and the provincial regulations that guide your LIRA. However, this decision is final such that if you do not unlock up to the full 50 percent when converting to a LIF, you would not be able to do this again.
You could elect to transfer some of your unlocked funds from a LIRA into a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (known as a RRIF) to avoid immediate taxes on cash withdrawals. Additionally, you may require consent from your pension partner –– a spouse or common-law partner when you want to convert your LIRA to a LIF. You are mandated to convert your locked-in retirement account for withdrawal by the end of the calendar year when you become 71 years of age.
Most financial institutions offer self-directed life income funds. With a self-directed LIF, you can build and manage your retirement investment portfolio by purchasing and selling various types of investments that align with your financial situation, retirement goals, and risk appetite.
Through a LIF, you can invest your retirement savings in financial assets such as stocks, bonds, mutual funds, Exchange Traded Funds (ETFs) etc. You also have the flexibility to control your investment portfolio mix held in the account.
A LIF operates in ways similar to a locked-in registered retirement savings plan. After converting your LIRA to a life income fund, it becomes an account that provides retirement income for you. You are mandated to make withdrawals from your LIF when you convert from your LIRA, usually by the following year. While you can withdraw from this account, there is typically a minimum and maximum amount applicable to annual withdrawals.
The entire funds in a life income fund cannot be withdrawn in a lump sum, normally. The LIF withdrawal limits are applicable rates that are based on your age and province. The minimum withdrawal limits are determined under the Income Tax Regulations, while the maximum withdrawal limits are determined by the Pension Benefits Standards Regulations in order to ensure that the funds in the LIF are enough to sustain a retiree for at least 90 years of age. The annual maximum amount of retirement income that can be paid from a LIF is usually calculated based on the fund balance at the start of the year.
Withdrawals from a locked-in income fund are subject to tax with a tax rate based on your combined personal income for the applicable year. In addition, some provinces require you to convert your LIF into an annuity when you reach a certain age.
Possible investment returns: Your financial assets in a LIF can continue to grow and make potential returns as you can still make investments in the financial market.
Tax deferral: Your money in the life income fund remains tax-free until you make withdrawals.
Investment flexibility: Through a life income fund, you have the flexibility of investing in a mix of financial assets such as stocks, mutual funds, bonds, and ETFs.
Unlocked pension funds: When converting your LIRA to a LIF, you may have access to a lump sum of your money depending on your age and the amount being transferred.
When you reach the applicable retirement age or simply need to transfer your pension funds from a current employer, you can often convert your locked-in pension funds into a life income fund. A LIF provides an excellent platform to manage and receive your retirement income periodically when you stop active employment. Through your LIF, you would be paid retirement income subject to a minimum and maximum amount annually. This process is usually straightforward and aided by a financial institution of your choice or your pension provider. You can control the investments in your LIF, and while your funds can grow due to investment returns, you could also make losses. There are tax implications when you make withdrawals from a LIF; therefore, it is important to speak with financial advisors when planning for retirement.
