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Life Income Funds
Why would I want a LIF instead of an annuity? Good question. It really has to do with the ownership of assets. If you use your retirement funds to buy an annuity, that is exactly what you did. You bought something with it and you no longer own the funds. With the LIF you do own the funds, subject to strings, and on your death they are directable by beneficiary designation or by will to your heirs. Not so with an annuity, where the best you can do is have a minimum guaranteed period in case you don’t survive very long into the life of the annuity. With the LIF, the remaining capital is your own asset and you can direct, either in your will or by beneficiary designation in the LIF contract itself, where the capital is to go. Owned asset versus non-owned. Very important, especially if you have heirs or wish to endow a charity.
Often Life Income Funds must come to an end at your age 80. This means that, whatever funds remain in the LIF at the end of the year in which you attain age 80, must be converted into a life annuity in support of yourself and your spouse (if any). So it’s very important that you plan maturity dates and other investment decisions around this fact.
Most financial institutions offer LIF’s. They can be fully guaranteed (ie GIC’s) or they can be based entirely in equities, or most anywhere in between. The foreign content rules apply to LIF’s as they do to RRIF’s and RRSP’s.
The author invites your enquiry if you are a candidate for a LIF, or think you might be.
© Provided as a service to the clients and associates of
STEPHEN B H SMITH, CEB, CFP, PRP
YORKMINSTER INSURANCE BROKERS LIMITED
105 Dorset Street West,
Port Hope, Ontario, L1A 1G4
Tel: 905-885-4977 Tollfree: 1-800-668-1751
Fax: 905-885-2556 Mobile: 905-373-5670
sbhs@yorkminster.ca| www.yorkminster.ca
By way of overview, a LIF is an option for those who have “locked-in” retirement funds and who do not want, at this stage at least, to commit them to an annuity. Once a retirement annuity is commenced it cannot be altered in any way such as to meet changing circumstances. A LIF, however, works more like a RRIF, which is much more flexible. If you understand how a RRIF works, this is the best way to describe how a LIF works.
Both RRIF’s and LIF’s are the payout version of an RRSP. With the RRSP you contribute your funds to save for retirement. The RRIF and the LIF are what you use when you retire and start drawing on those funds for living expenses. These are the instruments you use to get your money out of the RRSP (or pension plan).
You use the RRIF for taking the funds out of a conventional RRSP such as you might have been contributing to during your working life (or a group RRSP). You use a LIF for taking the funds out of a Registered Pension Plan if the RPP is giving you this option. These funds are normally “locked in” and you can’t have such ready access to them as you do with your own savings.
Why are the funds “locked in”? Registered Pension Plans and Deferred Profit Sharing Plans, and the like, are set up to provide a guaranteed lifetime income to employees and their spouses. This means the payments must continue for their combined lifetime. Period. So this is why life annuities were the only option, until relatively recently. No way to get your hands on the capital.
You could end up with “locked-in” registered funds in an RRSP on account of leaving an employer who provided your accumulated retirement benefits in the form of a “deferred annuity”. You might not want to leave them with the former employer’s pension plan for many years so you opt to take the funds as a “locked-in” RRSP. These funds you would have access to only by way of an annuity or a LIF. Some employer pension plans provide for you to take the funds and purchase an annuity or a LIF, so you might end up with “locked-in” funds at retirement, or before retirement.
You see, with a RRIF, since it’s only your money that went into it, you can take it all out anytime you like (and pay tax on it). But when an employer has been contributing to a pension plan along with you, and the objective of the pension plan is that you and your spouse have a lifetime income from it, it’s not just your money. It isn’t just you that calls the shots about how it gets de-registered. And so came into being the concept of “locked-in” retirement assets. So this is where the funds come from for Life Income Funds.
How do they work? They work much the same as a RRIF except that there is a maximum amount you can take out in any one year (no maximum with a RRIF, only a minimum). The maximum is set by a complicated formula which involves the CANSIM rate, set monthly by The Bank of Canada and based upon average rates obtained in long term bonds issued by Canada in the preceding month. So, it is interest-sensitive, but that is not always immediately obvious when your LIF income drops on renewal of your contract, even though interest rates appear to have gone up in the intervening period since you last renewed it. Suffice to say, it is a complicated formula.