A Life Income Fund (LIF) is a critical financial instrument for many Canadian retirees, particularly those participating in employer pension plans. This guide will examine all aspects of LIFs, from basic definitions to withdrawal rules and provincial variations.
What is a Life Income Fund?
A Life Income Fund (LIF) is a type of registered retirement income fund (RRIF) specifically designed for Canadians who need to convert their locked-in pension funds into a steady stream of retirement income.
Unlike a standard RRIF, which holds savings from registered accounts like RRSPs, a LIF is exclusively for funds that originated in a registered pension plan and remain locked-in under federal or provincial pension law.
The Flow of Your Pension Funds: From Pension to LIF
The typical path for lock-in pension assets in Canada is as follows:
- Contributions (from employee and/or their employer) go into a locked-in workplace pension account (like a Defined Benefit or Defined Contribution Plan (DCPP)).
- If an employee leaves their job before retirement, the pension must transfer to a Locked-in Retirement Account (LIRA).
- At retirement, when you are ready to start drawing an income, the LIRA is transferred to a Life Income Fund or used to purchase an annuity.
- The LIF provides regular tax-sheltered retirement income for life.
The funds in a LIF are subject to minimum and maximum annual withdrawal limits, which will be detailed in the latter part of this guide.
When Do You Need a Life Income Fund?
A LIF is necessary for anyone who has funds in a LIRA and wants to begin receiving retirement income. The conversion from a LIRA to a LIF is mandatory by age 71. You can choose to convert it earlier, once you reach the early retirement age specified by the governing pension legislation (typically age 50 or 55).
LIFs are not required if your retirement savings are solely in RRSPs, TFSAs, or other non-locked-in savings tools. Instead, you would convert your RRSP to a regular RRIF.
If you still participate in a DCPP when you decide to draw retirement income, some plans offer a Variable Benefits Account. This pays income like a LIF while staying invested in the original plan. Either way, your pension assets will end up flowing into a LIF-like account.
Who Can Transfer Money to a LIF?
You cannot contribute directly to a LIF account. A LIF can only be funded by transferring in locked-in funds from:
- Owners of other LIFs or LIRAs
- Members of the DC plan or DB plan who have reached early retirement age (if the plan permits)
- Spouses or common-law partners following a relationship breakdown
- Members or survivors of Registered Pension Plans
Each scenario involves funds originating in registered pension plans and remaining subject to pension legislation.
Life Income Fund Withdrawal Rules in Canada
The withdrawal rules are the most complex aspect of a LIF, as both federal and provincial regulations impose strict parameters on how much you can withdraw annually.
LIF Minimum Withdrawal Requirements
The minimum withdrawal rules for LIFs are the same as RRIF withdrawal rules under the federal Income Tax Act:
- First-year exception: No minimum withdrawal is required in the calendar year the LIF is opened
- Subsequent years: Minimum withdrawal based on a percentage of the LIF balance as of January 1
- Age-based calculation: The percentage increases with age, starting at approximately 4% at age 65. If you have a younger spouse, you may use their age to calculate the minimum withdrawal, which results in a smaller required payment and less taxable income.
The minimum withdrawal factor is calculated as 1 ÷ (90 – age) for those under 71, and then follows a prescribed schedule.
| Age at Start of Year | Minimum Withdrawal Percentage |
|---|---|
| Under 71 | 1/(90 – age) |
| 71 | 5.26% |
| 72 | 5.40% |
| 75 | 5.82% |
| 80 | 6.82% |
| 85 | 8.51% |
| 90 | 11.92% |
| 95 and over | 20.00% |
LIF Maximum Withdrawal Limits
Unlike RRIFs, a LIF has a maximum annual withdrawal limit that varies by province. The maximum is the greater of two amounts:
- The reference rate factored on your age, published by the Bank of Canada (the CANSIM series V122487), multiplied by the balance of your LIF at the beginning of the year.
- The investment earnings in your LIF from the previous year. This option is available in Alberta, British Columbia, and Ontario, and can allow for larger withdrawals in years following strong market performance.
Your financial institution is responsible for calculating your specific minimum and maximum withdrawal amounts each year. The maximum withdrawal rates vary by jurisdiction and can be found at: empire.ca. 2025 LIF Minimum/Maximum Withdrawal Percentages.
Major change for Quebec LIFs in 2025: Effective January 1, 2025, the government of Quebec has eliminated the annual maximum LIF withdrawal limit for account holders aged 55 and over. This change provides significant new flexibility for retirement and tax planning; however, no amount can be directly transferred from a Quebec LIF to an RRSP or RRIF. For more information, visit Quebec Amendments related to LIFs as of 2025.
In short, the minimum and maximum withdrawal rules reflect the fundamental purpose of LIFs: to provide a sustainable lifetime income from pension savings. These rules ensure retirees receive sufficient income while preventing them from depleting their savings too quickly.
How to Withdraw Money From a LIF
LIF withdrawals must follow specific regulatory guidelines. You can draw money as follows:
- Regular income payments (monthly, quarterly, semi-annually, or annually)
- Occasional lump-sum withdrawals (within annual limits)
- A combination of regular payments and occasional withdrawals
You cannot withdraw the entire balance as a lump sum except under specific unlocking provisions. At the beginning of each fiscal year, you must specify the amount you wish to withdraw within the permitted minimum-maximum range.
Withdrawal instructions are provided to your financial institution, which then processes payments according to your schedule. All withdrawals are subject to applicable tax withholding.
Tax Implications of LIF Withdrawals
LIFs offer tax-sheltered growth similar to other registered retirement accounts. The key tax aspects include:
- Investments grow tax-deferred within the account
- Withdrawals are taxed as regular income in the year they’re received
- Financial institutions issue T4RIF slips for tax reporting purposes
- Tax withholding applies to withdrawals, with rates varying by withdrawal amount
This tax-deferred growth allows your retirement savings to accumulate more efficiently until withdrawal, at which point they’re subject to your marginal tax rate
Investment Options Within a Life Income Fund
LIFs provide a wide range of qualified investments similar to those allowed in RRSPs and RRIFs. Investment choices significantly impact both income sustainability and growth potential.
Permissible LIF investments include:
- Cash and savings accounts
- Guaranteed Investment Certificates (GICs)
- Government and corporate bonds
- Mutual funds
- Exchange-traded funds (ETFs)
- Publicly traded securities
Real estate, private company shares, and other non-qualified investments are among those prohibited by the Income Tax Act.
Effective LIF investment strategies balance multiple objectives:
- Income generation: Sufficient yield to meet minimum withdrawal requirements
- Growth potential: To offset inflation and extend longevity
- Volatility management: To reduce sequence-of-returns risk
- Liquidity needs: For accessibility of funds at required withdrawal times
Many financial advisors recommend a balanced approach with sufficient fixed income to meet short-term needs while maintaining some equity exposure for long-term growth.
What are the Pros and Cons of a LIF?
In summary, LIFs provide key benefits for retirees, but also propose some limitations to consider:
| Benefits of LIFs | Drawbacks of LIFs |
|---|---|
| Investments within a LIF grow tax-deferred until withdrawal | Maximum withdrawal limits restrict access to your own capital |
| The maximum and minimum limits provide a structured, predictable income stream | Rules are complex and vary by province, creating administrative hurdles, especially for those who’ve worked in multiple provinces. |
| LIF assets are generally protected from creditors | You cannot establish a LIF until you reach early retirement age |
| LIF owners can control their investment decisions | A conversion to an annuity at age 80 is required if you live in Newfoundland and Labrador |
| Options for tax-efficient transfer to spouses or beneficiaries | Market volatility can impact the fund’s value and future income |
These advantages make LIFs valuable components of many Canadians’ retirement income strategies while the limitations can frustrate retirees who want greater flexibility or need access to larger portions of their funds.
What Happens to Your LIF When You Die?
This is a critical aspect of estate planning. Upon the death of the LIF owner, the surviving spouse is generally entitled to the full remaining balance of the LIF. The funds are paid directly to the spouse, bypassing the estate.
The treatment of these funds depends on the LIF’s jurisdiction. For most provincial LIFs (like Quebec and Ontario), the spouse can roll the funds into their own RRSP or RRIF, effectively “unlocking” them. For a federal LIF, the funds must be transferred to a locked-in account in the spouse’s name.
If there is no surviving spouse, or if the spouse had previously signed a waiver, the remaining LIF balance is paid to the named beneficiaries or the deceased’s estate. In this case, the funds are no longer locked-in and are fully taxable to the recipient.
Alternatives to Life Income Funds
Instead of managing income distributions yourself using a LIF, registered annuity products also work. When you purchase an annuity from an insurance company, you give them a lump sum in exchange for a guaranteed, predictable payment for the rest of your life. An annuity eliminates market risk and the need to manage investments, but you give up control of the capital and flexibility.
For those seeking strict income guarantees without investment duties, annuities may provide more peace of mind. LIFs, conversely, offer greater flexibility and control for retirees wanting to manage their own pension assets. Many retirees use a combination of both to balance security and growth.
FAQs about Life Income Fund in Canada
What is the difference between a LIF and an RRIF?
While both provide retirement income, a LIF holds locked-in pension funds with minimum and maximum withdrawal limits. An RRIF holds non-locked-in RRSP funds and only has minimum withdrawal requirements. LIFs are subject to provincial pension regulations, while RRIFs fall solely under federal tax laws.
Can I withdraw money from my LIF for financial hardship?
Some provinces allow hardship withdrawals under specific circumstances, but the criteria are strict. Financial hardship provisions vary by province and typically require substantial documentation. Consult your provincial pension regulator or financial advisor about hardship provisions in your jurisdiction.
Can I combine multiple LIFs into one account?
Yes, you can consolidate multiple LIFs from the same pension jurisdiction into a single LIF. However, if different provincial regulations govern your LIFs, they must remain separate. Consolidation can simplify administration but doesn't change the locked-in status of the funds.
What investment options offer the best returns in a LIF?
The optimal investment mix depends on your risk tolerance, income needs, and time horizon. Many financial advisors recommend a balanced portfolio with fixed income for stability and equities for growth potential. All investments must qualify under Income Tax Act regulations for registered accounts.
What's the difference between a LIF and a LIRA?
A LIRA holds locked-in pension funds before retirement and doesn't allow withdrawals. An LIF holds these funds during retirement and provides income through regulated withdrawals. You convert from a LIRA to a LIF when you're ready to begin receiving retirement income.
Article Sources
- Government of Canada. osfi-bsif.gc.ca. “Life Income Funds, Restricted Life Income Funds, and Variable Benefits Accounts.”
