Canada has more than a few government-regulated accounts and registered plans to help people prepare for retirement.

Some, like registered retirement savings plans, or RRSPs, are generally a good match for many working Canadians. Others, like life income funds, or LIFs, are more specialized and designed for people in certain circumstances.

A LIF is a registered account for your locked-in employer pension funds. If you transfer funds from a pension into a locked-in retirement account, or LIRA, you will eventually need an LIF.

Life income fund pros and cons

Pros

LIFs are tax-sheltered accounts. You only pay taxes when you withdraw the money, typically in retirement.
You can delay receiving income from an LIF up to age 71, allowing it more time to grow without paying taxes on it.
The annual withdrawal from an LIF makes it easier to plan your retirement strategy.
LIFs allow you to choose your own investments.

Cons

LIFs have strict rules about how the account can be used and what investments it can hold.
You can’t start an LIF until you reach the early retirement age of the province in which the original pension plan was registered.
An LIF’s withdrawal rules can mean you won’t have easy access to all your money if you need it.
LIFs are governed by the rules of the province or territory where you worked when you earned the pension funds, even if you’ve since moved to a new province or territory. That might make it hard to connect with an advisor who fully understands the rules around your LIF.

What is a life income fund?

An LIF is a type of registered retirement income fund, or RRIF, in Canada.

If you worked for an employer that offered a pension plan but left the job before you retired, you likely transferred those funds to a locked-in retirement account, or LIRA. That’s because provincial laws state that you can’t access those funds until you retire, which is known as being “locked in.”

When you reach the retirement age specified by your provincial legislation, you can convert the LIRA to an LIF and start receiving funds.

You can’t contribute to an LIF. It’s just for withdrawing the money that was held in a LIRA.

You also can’t withdraw all the funds as a lump sum from your LIF, as there’s an annual maximum withdrawal amount. In addition, like other RRIFs, there is an annual minimum amount you must withdraw every year. The goal is that the account will help support your retirement income for the remainder of your life.

» MORE: Defined contribution vs defined contribution pensions

LIF eligibility

Only people who rolled locked-in pension funds into a LIRA will eventually need to convert that account into an LIF. If you don’t have a LIRA, you are not eligible for an LIF. Instead, you’ll want to look into converting your RRSP to an RRIF.

If you have a LIRA, you can choose to transfer it into a LIF as soon as you reach the retirement age specified by the province in which your pension is held. LIRAs must be moved into an LIF by December 31 on the year in which you turn 71.

» MORE: How to get retirement-ready

How to withdraw funds from an LIF

LIFs have a number of withdrawal restrictions. For example, you generally cannot withdraw the whole amount in your LIF as a lump sum, as there are annual withdrawal maximums.

Similar to RRIFs, you are required to withdraw a minimum amount from your LIF account every year. This amount is a percentage of the total account balance and varies by age. The minimum and maximum LIF withdrawal percentages also vary based on the province in which you reside. These percentages change annually as they are specified by the Income Tax Act.

There are a couple of special specific circumstances in which you may be able to withdraw more than the annual maximum from your LIF. These include becoming a non-resident of Canada, being diagnosed with a terminal illness, and experiencing financial hardship.

» MORE: What you should know about provincial tax rates

What are the rules and tax implications of a life income fund?

Like LIRAs, LIFs are tax-sheltered. This means you don’t pay taxes on LIF funds until you withdraw them, at which point they are part of your taxable income.

Come tax time, the financial institution where you opened the LIF should provide you with proper tax documentation (a form T4RIF).

While the above withdrawal and tax implications are generalized across Canada, some rules differ from province to province.

Some provinces offer a one-time lump-sum unlocking option, for example. This is only available to individuals of a certain age, such as age 55 in Manitoba. In this situation, a portion of the money from the LIF can be withdrawn as cash (in which case it is taxed as income) or transferred to an RRSP or RRIF (not taxed).

In addition to the annual withdrawals, some provinces allow an additional withdrawal every year, referred to as temporary income.

Should you pass away with money remaining in your LIF, the balance will be paid to your spouse, your estate or a named beneficiary. Some provinces may allow the beneficiary to transfer it into their own RRSP or RRIF tax-free, but others may require them to remain locked and be transferred to a locked-in RRSP or LIF.

Federal legislation covers pensions earned in the Yukon, Northwest Territories and Nunavut, while PEI does not have pension legislation and locked-in accounts aren’t available. If you are unsure of the rules surrounding LIFs where you live, get in touch with a retirement expert at your financial institution or a financial advisor to discuss your options.

LIF alternatives

Canadians with a LIRA also have the option of converting it into a life annuity.

A life annuity is managed by a financial institution whereas you manage the LIF yourself.

And while an annuity is protected from market fluctuations and provides a guaranteed income so you always know how much you will receive, an LIF is an investment account, so its value (and therefore the minimum and maximum annual withdrawal amounts) fluctuates with the market.