Home » Mutual Funds » Discovering life income funds: Everything you need to know

Discovering life income funds: Everything you need to know

Many people are concerned about rising inflation, particularly those approaching retirement and living in a foreign country such as Canada, where the cost of living is far higher than in India. In this instance, if you do not prepare to have sufficient funds to meet your necessities and medical expenditures, you may have difficulties in your latter years of life. That is where the Life Income Fund (LIF) comes in. 

In this article, we will cover what is an LIF, eligibility for an LIF, and LIF pros and cons

What is a LIF?

A life income fund or, better say, LIF is a registered fund common in Canada. It allows you to convert your pension or locked-in retirement account (LIRA) funds into retirement income. 

LIRA holds your pension funds if you leave your employer before retirement. However, you cannot access funds in LIRA until you attain a specific age, usually 55 or older. Wondering how to withdraw funds from an LIF

For LIF withdrawal, you need to understand the following rules.

  • The RRIF defines minimum withdrawals from life income funds.
  • Your spouse’s age cannot determine the minimum payout under this scheme.
  • Since your withdrawal is considered your earnings, there is a LIF tax implications. 
  • To receive regular payouts from this scheme, you must either attain the minimum retirement age or complete the actual retirement date. 
  • You can start getting payments in the year right after you turn 71.

Eligibility for an LIF

To be eligible for a LIF, you must meet the following criteria:

  • You must be at least of early retirement age as specified in the pension legislation of the province where your funds originated. Depending on the province, this age may vary from 50 to 55.
  • You must convert your LIF to a life annuity or another retirement income option by the end of the year in which you turn 80.

LIF Pros and Cons

Here are the benefits and drawbacks of a life income fund that you should consider. 

Advantages of LIF:

Tax deferral

You only pay tax on your LIF funds once you opt for withdrawal. This allows you to grow your investment with the help of compounding benefits. You can also reduce your tax liability by withdrawing only the minimum amount required each year and deferring the rest of your income to later years when you fall in the lower tax bracket.

Investment control

You have the freedom and flexibility to decide where you want your capital to be invested. You can decide your investment based on your risk appetite, time horizon, and expected return. You can also change the proportion of asset allocation. However, be aware of the associated fees. 

Income flexibility

You can decide how much and how often you want to withdraw from your LIF as long as you follow the minimum and maximum limits set by the government. Adjusting your withdrawal amount and frequency according to your changing income needs is also an option.

Beneficiary selection

Naming a beneficiary can help you avoid probate fees and estate taxes. It also ensures that your LIF funds are distributed according to your wishes. If your beneficiary is your spouse or common-law partner, they can continue receiving income from your LIF, transfer the balance to their own LIF or RRIF, or obtain a lump-sum payment. But, if the beneficiary is someone else, they can only accept a lump-sum payment, subject to tax. 

Disadvantages of LIF

Market volatility

The LIF value and the income you can withdraw depend on the performance of the underlying securities in the scheme. If the market goes down, your investment value drops. There is also the risk of the sequence of returns. That means if you experience negative returns in the early years, you may deplete your LIF funds faster and reduce your future income potential.

Longevity risk

If you live longer than expected, you may outlive your LIF funds and face a shortfall of income in your later years. You may also face the risk of inflation, which means that the purchasing power of your earnings may decline over time as the cost of living increases.

Regulatory changes

The rules and regulations governing LIFs may change over time due to changes in government policies, economic conditions, or social trends. These changes may affect taxation on LIF withdrawal, your overall returns, and your options and flexibility regarding your LIF funds. 

What are available LIF alternatives?

If you are Indian, there is no alternative to LIF. However, the National Pension Scheme (NPS) is an investment alternative that operates similarly to the LIF. The Pension Fund Regulatory and Development Authority (PFRDA) oversees this scheme. 

Here are some key details you must know about NPS.

  • NPS aims to provide a regular income after retirement by investing your contributions in various market-linked instruments. 
  • You can open an NPS account with any registered entity called Points of Presence (POPs) and get a unique Permanent Retirement Account Number (PRAN).
  • There are two kinds of NPS accounts: Tier-I and Tier-II. 
  • Tier I is the primary account, and you must contribute a minimum of Rs. 500 per month or Rs. 6000 per year. You can withdraw up to 60% of the total balance at 60, and the rest has to be used to buy an annuity that will give you a monthly pension. 
  • Tier II is an optional account for depositing and withdrawing money anytime without tax benefits.
  • You can choose between two investment options: active and auto. In the active option, you can decide how to allocate your funds among four asset classes: equity (E), corporate bonds (C), government securities (G), and alternative investments (A). In the auto option, the fund manager will automatically modify the asset allocation based on your age and risk profile.


LIF is a retirement plan available to Canadians. This investment option provides the investor with consistent income and numerous tax benefits. However, if you are an Indian citizen, you can use NPA to make your retirement years enjoyable. To know more, read StockGro blogs. 


What is a life income fund?

An LIF is a registered fund offered in Canada. You can use it to hold locked-in pension funds and other assets for an eventual payout as retirement income. 

How are LIF payments taxed?

LIF payments are taxed as regular income. It means they are added to your other sources of income and taxed at your marginal tax rate. 

 How do I unlock a LIF?

Unlocking an LIF means you can withdraw some or all of your LIF funds in a lump sum instead of receiving regular income payments. You can do this if there is a medical emergency, you are dealing with high debts, or you are a non-resident of Canada.

 What are the disadvantages of a LIF? 

One downside of this investment is that you cannot withdraw your funds in normal circumstances. Another downside is that an LIF does not guarantee a lifetime income unless you purchase a life annuity with your remaining LIF funds at a later date.

What are the benefits of a LIF?

 LIF benefits investors by offering tax-deferred growth of contributions and flexibility to decide on the underlying asset of the LIF. 

Enjoyed reading this? Share it with your friends.

Post navigation

Leave a Comment

Leave a Reply

Your email address will not be published. Required fields are marked *