Life income funds (LIFs) and locked in retirement income funds (LRIFs)

If you live or work in Canada, you may have access to a retirement income fund known as life income funds (LIFs) or locked in retirement income funds (LRIFs). While these two perform very similar functions, there are key differences that you should be made aware of early in your investing career. A LIF holds pension funds through the company’s chosen financial institution, and the funds cannot be withdrawn until you retire. Once you retire, the funds will be made available to you for you to use or invest in a variety of ways. The key thing to understand regarding LIFs is that after retirement you can only withdraw a certain amount per year, instead of as a lump sum. This system encourages you to maintain a retirement income that can support you for the rest of your life, and there are various checks to make sure that you do just that. The Canadian Income Tax Act specifies the minimum and maximum amount you can withdrawal every year, and that amount is decided by the money you have in your LIF fund and your other annuities. For many Canadian provinces, LIFs also require you to buy a life annuity at age 90. This prevents you from outliving your income, so your standard of living is guaranteed no matter how long you live. The downside is that you won’t have the freedom to invest in your money as you’d like.

Locked-In Retirement Income Funds (LRIFs) has pretty much the same concept — your retirement only savings are withdrawn as regular annual income payments that you can invest as you please. Unlike the LIFs, LRIFs are only available in certain provinces (Ontario, Manitoba, Saskatchewan, Newfoundland, and Labrador). There is a calculated minimum and maximum amount you can withdraw for LRIFs as well. The difference lies in the fact that for LRIFs, only the minimum is based on a standard formula. The maximum is based primarily on your income earned in the last one or two years. This means that if you have had a great year or two in terms of income and investments, you’ll be able to withdraw a lot more money than a LIF would allow you to, so you don’t have to “play it safe” as much if your investments are looking strong. LRIFs also don’t require you to buy a life annuity at age 90, so you can invest your money as you like no matter how long you live.

There is no “best” strategy for your retirement; you must look at the financial freedom and security that you want for yourself. Make sure to talk to a financial professional before you commit yourself to a plan.