Retirement Income Vehicles

RRIFs, LIFs, Guaranteed Lifetime Income Benefit and Annuities

Despite the different acronyms, RRIFs, LIFs, GLIBs and Annuities all work in much the same way. All four products are designed to help you convert your Registered Retirement Savings to Retirement Income.

Registered Retirement Income Fund (RRIF)

A Registered Retirement Income Fund is a way of turning the accumulated value of a non-locked-in registered savings plan - typically a registered retirement savings plan (RRSP) - into a retirement income.

The income from a RRIF is extremely flexible. You can choose the payment amount, subject to a required minimum that's based on your dollar balance and your age. You can also vary the income from one year to the next to help meet your changing income needs or financial obligations. You might, for example, choose to have your income increase from one year to the next to help combat inflation or take a great trip.

NOTE:
A RRIF cannot be used if the registered monies are coming out of a locked-in retirement account (LIRA) or a registered pension plan (RPP). The monies must be coming from an RRSP, or be deemed to be Additional Voluntary Contributions (AVC) if coming from a registered pension plan (RPP).

Life Income Funds (LIF)

A Life Income Fund (LIF) is used to pay out the accumulated value of locked-in registered funds from a Locked-in RRSP, a LIRA or a RPP.

Although a LIF is very similar to a RRIF, it is designed to provide an income that will last for a lifetime, so the payment schedule is not quite as flexible. You can't, for example, under normal circumstances cash out your LIF. The government sets both a minimum and maximum for the payments you can receive each year from your LIF. Within this range, you can choose whatever payment stream you like.

NOTE:
The presiding legislation is based on where the income was earned.

Guaranteed Lifetime Income Benefit

Likely the easiest way to explain the Guaranteed Lifetime Income Benefit is that it is a product which is situated between LIFs / RRIFs and Annuities. In other words, an annuitant would have a guaranteed income for Life, but as well, would have the opportunity for growth in his portfolio should the markets perform well.

The Guaranteed Lifetime Income Benefit puts you in control of your retirement savings and income by guaranteeing your income for life. Your income will not decrease regardless of how the markets perform. Hence, you are provided with protection against the risks of longevity, inflation, and volatility of market returns.

This type of product is often just one component of a well diversified retirement income portfolio. Typically, we would recommend to clients that they not put all their eggs in one basket; however, use a number of different products in arriving at their retirement income.

The Guaranteed Lifetime Income Benefit provides a guaranteed income for life, which can start as early as age 50 with some providers; however, other policies do not start distributing income until age 65. Therefore, it is important that you see the various products in the marketplace and determine which one best suits your situation.

One item to keep in mind is that these products cannot be used for any locked in monies, i.e. Pension monies or Locked-In Retirement Accounts (LIRAs). This product can only be used with RRSP monies and non-registered monies.

Furthermore, this type of product offers two methods of increasing your Lifetime Income:

Deferral Bonuses - Depending on the carrier, you can be eligible to earn a deferral bonus every year until you make a withdrawal. Currently, most carriers are offering a 5% Deferral Bonus. Consequently, the deferral bonus can help you grow your Lifetime Income Benefit even when markets are down.

Income Resets - The Income reset generally occurs every three years and is available for the life of the policy.

The income reset can increase every three years when the policy value is greater than the existing Lifetime Income withdrawal base. Therefore, once your Lifetime Income withdrawal base increases, it is guaranteed for life... regardless of any future decreases in the markets, and assuming no excess withdrawals are made.

This type of product can seem almost too good to be true! There is a catch... the carriers do charge increased Investment Management Fees in order to cover off the excess risk on this type of product. Furthermore, guarantees can be put in place in the event of death and on the maturity value of the monies. Again, these items are determined based on a charge to the Investment Management Fees.

Annuities

Annuities provide a guaranteed income for a defined period with no investment management and no ongoing invest risk. A "life" annuity is simply a contract you sign with a life insurance company. Under the terms of this contract, you may make a lump-sum payment to the insurer in exchange for a guaranteed income stream, i.e. a pension.

Depending on the type of annuity you choose, the annuity can be payable for a specified period or as long as you live, and it may continue to your spouse or other beneficiary after your death. Your choice may be restricted - depending on the type of plan your lump-sum payment was made from.

The actual money income you receive from your annuity will depend on a number of factors, including:

• The amount of money used to purchase an annuity.
• The more money you convert, the larger your income will be
• Your age.
• Generally speaking, the older you are when you start to receive your annuity, the higher your annuity income will be.
• Younger retirees receive less annuity income each month because they are expected to live longer.
• The type of annuity you purchase.
• Different annuities offer different features. Some features are quite valuable and, in exchange, result in a lower monthly income.

There is one other important factor that will have a material impact on the size of your monthly annuity payments: the interest rates in effect at the time you annuitize (i.e. convert) your savings. Generally speaking, the interest rate used at the time of conversion is fixed for the lifetime of your annuity payments.

If you purchase your annuity when interest rates are very low, your income will be lower. When interest rates are high, on the other hand, the annuity income is increased. Unlike when you get a mortgage or car loan, this is one of those times when high interest rates work in your favour.

Summary

By requesting your account be registered as a Registered Retirement Income Fund, Life Income Fund, Guaranteed Lifetime Income Benefit or an Annuity, you are requesting it to be registered under the Income Tax Act, and if necessary, the taxation Act in Quebec. This account must provide income and will become payable and taxable in the year in which it is received.