Life Income Fund (LIF),Locked-in Retirement Income Fund (LRIF),Restricted Life Income Fund and a prescribed Registered Retirement Income Fund (RRIF).

Income and tax-sheltered growth

If you left a job where you had a pension plan, you may have transferred your pension entitlement to a locked-in retirement account (LIRA) or locked-in RRSP, where it has been invested according to your directions. Typically, that money cannot be withdrawn until you start retirement.

All Jurisdictions in Canada share the same minimum payout requirements. However, the maximum payouts allowed do vary between jurisdictions. (See the Registered Plan Minimum and Maximum Payout After a minimum age (age 55 except Alberta where it is age 50) you can start to receive income from this pension money by converting it into a LIF or LRIF/RLIF or buying a life annuity. (Depending on your province, you may have a choice between the 2 types of accounts. As well, there may be different rules affecting these accounts.)

In many ways a LIF/LRIF/RLIF works like a LIRA or locked-in RRSP in reverse: Instead of putting money in, you take an income out. While there are rules governing minimum and maximum withdrawals every year, a LIF/LRIF/RLIF keeps you in control of how your money is invested. Converting to one of these payout registered plans allows you to continue with the same investments you held in your LIRA or Locked-in RRSP. The additional option is a Payout Annuity.

What is the Difference between a LIF, LRIF, pRRIF, RLIF?

Life Income Fund (LIF) and Locked-in Retirement Income Fund (LRIF)

What is a LIF?

LIFs and LRIFs are very similar. The main differences between them are:

• LRIFs are only available in Newfoundland and Labrador
• The maximum amount that can be withdrawn from an LRIF is calculated differently

In general, LIF and LRIF work like an RRIF in retirement and are a pension vehicle for receiving regular income. Similar to an RRIF, you are also required to withdraw a minimum income from your account annually, and income earned is tax-sheltered until it’s withdrawn.

A few differences between a LIF and RRIF are as follows:

• Unlike an RRIF, you can only transfer locked-in pension funds into a LIF
• There’s a maximum cap on the maximum amount you can withdraw from a LIF per year
• In Newfoundland and Labrador, LIFs must be converted and used to purchase a life annuity when you turn 80. However, this restriction does not apply to an LRIF.

Restricted Life Income Funds (RLIF)

The RLIF is slightly different from a LIF in that it gives you a one-time opportunity to transfer up to 50% of your pension funds into a regular RRSP or RRIF.

It is set up to cater to retirees with pensions that are federally regulated, and they can transfer their federal pensions, LRSPs, and LIFs into an RLIF.

One similarity between an RLIF, LIF, and LRIF is that annual minimum and maximum withdrawals apply to all three. The maximum limits are generally calculated using your age, the applicable CANSIM rate, and the value of your pension plan.

Prescribed Registered Retirement Income Funds (PRIF)

Manitoba and Saskatchewan have RRIFs that are governed under provincial pension legislation. The plan is referred to as a prescribed RIF and is designed to provide seniors with greater flexibility.

You need to be at least 55 years old to purchase a PRIF.

Like the regular RRIF, there is a minimum amount you must withdraw annually and there’s no requirement to purchase a life annuity at age 80. However, unlike a LIF or LRIF, there’s no maximum limit to the funds you can withdraw per year.

You can transfer money from the Saskatchewan Pension Plan, a LIRA, LIF, or LRIF into a PRIF.

What is the problem with LIF/LRIF/RLIF/pRRIF?

The earlier mentioned Minimum Payment Requirements increase as you age. Up to your mid 70’s these minimum payout percentages are reasonably attainable with a moderate risk investment portfolio. By your age 77 the payout percentage of 6.17% becomes a challenge to achieve without exposing you to excessive investment risk and volatility. Consequently, many seniors face 2 conflicting challenges: 1. Invest with less Risk and watch your asset value decline each year And your income also decline or 2. Continue with a Portfolio that can achieve these higher rates of return and suffer the risk of higher volatility in your portfolio. Option 1 is a guaranteed decline in assets and income; Option 2 is a sudden decline in asset value with a resulting decline in future income.

Depending upon your circumstances there are strategies and products which can lessen the impact of these aging problems with LIFs, LRIFs, RLIFs and pRRIFs.

Registered Retirement Income Fund (RRIF) 

 A registered retirement income fund (RRIF) is an arrangement between you and a financial institution (an Insurance Company, a Trust Company, Bank, Investment Dealer) that is registered with CRA and able to offer RRIF accounts. You transfer property using the government prescribed process to your RRIF carrier from an RRSP, a PRPP, an RPP, an SPP, or from another RRIF.  

The minimum amount must be paid to you in the year following the year the RRIF is established. This is called a Minimum Annual Payment (MAP) and is determined by your age on December 31^st of the previous year in which payments are made. (In our Resources Section we have a complete Guide to Minimum and Maximum Annual payout percentages for all Registered Income products in Canada.) The actual required payment is the calculation of the MAP percentage x the December 31^st account value. i.e., 12/31 Account Value = $1,000,000; Age at 12/31 = 71 MAP @ 71 = 5.28% ($1,000,000 x 5.28% = $52,800) 

Like an RRSP, earnings in a RRIF are tax-free, and amounts paid out of a RRIF are taxable on receipt. 

You can have more than one RRIF and you can have self-directed RRIFs. The rules that apply to self-directed RRIFs are generally the same as those for RRSPs. Prior to your age 71 you can simultaneously have both a RRIF and an RRSP. If your income needs are modest, you could choose to receive income from part of your RRSP savings by establishing a RRIF with part of your RRSP total. The above referenced MAP requirements may influence the amount of RRSP money you convert to a RRIF. 

If you have a spouse or common-law-partner as defined by CRA and they are younger than you, you can elect to use their age as the qualifying age to determine the MAP. i.e., you are 71 and your spouse is 65. MAP at age 71 is 5.28% versus age 65 @4.00%. This may impact the longevity of RRIF investment.  The lower the payout percentage the lower the inherent risk. Post your age 65, RRIF income can be split with your spouse or common-law-partner for tax purposes.  

Taxation of RRIF income is unique and is impacted by the timing of setting up your RRIF and when you initiate income. If you set up a RIFF and receive income in the same calendar year, your entire income is subject to a withdrawal taxation formula. 10% on the 1^st $5,000; 20% on the next $10,000 and 30% on everything above $15,000. In Quebec the required percentage is exactly ½ at each income increment. Incremental withdrawals will be assessed on the total amount for the year and taxed at the maximum level commensurate with this total. At 30% this tax rate is onerous and only those earning in excess of $148,780 of total taxable income in a year would exceed this 30% on an average tax payable basis.   

If you establish your RRIF in the previous year and initiate income in the current year the taxation rules offer greater flexibility. For income amounts up to the MAP required payment, you do not have to have at source tax withheld. Income Tax must be withheld for amounts in excess of the MAP and are taxed using the lump-sum withholding tax rates. Generally, tax planning would suggest having tax withheld commensurate with your overall average tax rate at source. 

If you have named your spouse or common-law-partner your beneficiary, then the RRIF account rolls over into their name. If they are not named and you either leave it to your estate or your children, you effectively take the entire account value into income and pay the tax rate commensurate with your total income for that year of death. Please check beneficiary designations with your financial institutions. It’s a little detail that can needlessly cost substantial amounts of tax and lost income. 

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