MODULE 13: UNIT 2 Life Income Funds (LIF), Locked-in Retirement Income Funds (LRIF) and Prescribed Registered Retirement Income Funds (PRRIF) Flashcards
Introduction
Life Income Funds and Locked-In Retirement - Income Funds are retirement plans for locked-in money originating from registered pension plans
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Unlocking Locked-In Funds: Special Circumstances
In some jurisdictions, there are circumstances where the following are applicable:
- Access to a cash payment or series of payments may be possible where the annuitant is certified to have a significantly shortened life expectancy because of a medical disability
- Access to a lump-sum cash payment may be possible where the total value of the plan assets is quite low, based on specific criteria in the jurisdiction
- Access to a lump-sum cash payment for the entire LIRA/locked-in RRSP account balance where the annuitant is no longer a resident of Canada under the Act
Unlocking Locked-In Funds: Prescribed RRIF
- As of April 1, 2002, the establishment of a prescribed RRIF under Saskatchewan pension legislation increases the options available for some individuals and in many senses “unlocks” pension assets for some individuals
- Funds can transfer from a qualified pension plan to RRIF
Eligible funds transferred to RRIF:
LIRA -when the annuitant reaches age 55 - can be transferred back when the annuitant is younger than 71 at the end of that year LRIF LIF
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Difference Between a Regular RRIF and a Prescribed RRIF
Origin of the fund
Beneficiary designation
-Spouse can waive the right to be a beneficiary
Life Income Fund (LIF):
Introduction
- An LIF is a restricted form of a RRIF designed to hold and distribute locked-in funds, and is subject to all of the rules of the Act that apply to RRIFs
- Subject to a maximum annual Withdrawal limit
- Some legislations require the assets of an LIF to be used to purchase a life annuity by the age of 80 or 90
Life Income Fund (LIF): Establishing
LIFs can only be established with funds transferred from specific registered plans, which can include:
- Another LIF
- A registered pension plan (subject to restrictions under the Act, and applicable pension benefits legislation)
- LIRA or locked-in RRSP
- Eligible life annuity
- some jurisdictions allow any age to pen a LIF, some restrict the minimum age to 50
- Matures at age of 71 and assets must be transferred to a payout time by that time
- Most provinces require spousal permission before registered plan assets can be transferred to an LIF
Life Income Fund: Types of LIF’s
Qualifying LIF (Jan 1 < 1993) -A qualifying LIF is one that was purchased before January 1, 1993:
- To which no property has been transferred after 1992
- To which property has been transferred after 1992 but the transferred property was from another qualifying LIF
Non-Qualifying LIF (Dec 31 >1992)
-A non-qualifying LIF is one that was established after December 31, 1992, or, an LIF that was originally established prior to 1993 and to which assets have been transferred from a source other than from a qualifying LIF, at some point since the beginning of 1993
Life Income Funds: Withdrawals From a LIF
- Payments from a LIF are established within a prescribed range of a minimum and maximum amount
- Minimum withdrawals must be made from an LIF each year, beginning in the year following its establishment
- Beginning in 1998, some provinces have allowed the use of a younger spouse or common-law partner’s age for calculation of minimum payments
Life Income Fund: Maximum
MAXIMUM
- Maximum = V / P
V = Value of LIF on Jan 1 P = Projected annual pension of $1 beginning of January 1 of the year and continuing for the period ending December 31 of the year in which the annuitant turns age 90
Interest Rate used to calculate annual payment:
-Not more than 6%
- Long-term Canadian bonds for the first 15 years and a maximum of 6% thereafter
ex. 2.2% on a LIF for the first 15 years and 6% after the 15 years has passed
Life Income Funds: Investments
Financial institutions must register investment products offered for LIF plans with the CRA and adhere to regulations specified in pension standards legislation
Life Income Funds: Asset Transfers - Prior to Annuitant’s Death
Before the annuitant turns 80, LIF assets may be transferred to other plans owned by the annuitant, including:
- LIF
- LRIF (Alberta, Manitoba, Newfoundland, Saskatchewan and Ontario)
- LIRA or locked-in RRSP (if age 71 or younger throughout the year of transfer)
- Life annuity
Life Income Funds: Tax Implications
Payments
- Minimum payments do not attract withholding tax
- All LIF payments are fully taxable as income to the annuitant the year withdrawals are made
Death of a LIF annuitant
- Same as designated benefit and qualified beneficiaries
- Provincial legislation may override will and beneficiary designation if there is a surviving spouse and the spouse is not named as beneficiary
Life Income Funds: Relationship Breakdown
Upon the breakdown of a relationship, assets of the LIF are subject to division in accordance with legislative requirements; spouses’ rights to benefits under a LIF account are terminated by separation or divorce
Life Income Funds: Conversion to a Life Annuity
In jurisdictions where a LIF annuitant must use the balance in the LIF account to purchase a life annuity prior to the end of the year in which he reaches age 80 (or sooner if chosen), the annuity must adhere to a minimum prescribed plan design
- Minimum prescribed plan design for the life annuity generally requires that:
- Annuity be guaranteed by an insurance carrier
- annuity be payable on a joint-lives basis
- If the annuity incorporates a reduction in the payout amount after the death of the annuitant, that reduction does not exceed 33.3% or 40%
- If annuity incorporates a guarantee period, the period cannot extend beyond age 90
Locked-In Retirement Icome Funds: Nature
- An LRIF is a restricted form of a RRIF designed to hold and distribute locked-in funds, and is subject to all of the rules of the Act that apply to RRIFs
- available as a payout option for pension assets
- minimum and maximum annual withdrawal
LRIF’s are subject to the same minimum payment rules as RRIFs and LIFs:
- The maximum payment for each year is equal to the greater of:
- The LRIF minimum prescribed payment
- Net investment income, which means the total income earned since the plan began less withdrawals for the same period (if funds were transferred into the plan during the prior year, then the net income from the prior year on the other plan is added to this criteria)
- The investment income earned during the immediately preceding fiscal year
- For the first two fiscal years, 6 per cent of the market value of the fund at the beginning of each year
