Pension Income Option Two: Life Income Fund (LIF)
The second option for creating income from your pension plan is to “commute” its value. When the proceeds of your pension account are moved into a locked-in plan, it is referred to as “commuting your pension.” Funds that are governed by provincial legislation can be moved into a locked-in retirement account (LIRA), which can be converted into a LIF or LRIF account (depending on the province) when income is required. Federally governed funds can be commuted into a locked-in RRSP, which is converted into an RLIF for income creation.
The features of these different plans are similar enough that I am taking the liberty of focusing on the LIRA/LIF just to save going back and forth among these income vehicles. This is intended to be a general description. In addition, legislation varies by province and federally. Make sure that you know what governing jurisdiction applies to your account. A summary table of provincial legislation can be found in the Appendix.
So how does the LIF work, how does it compare to a life annuity and why might you choose one over the other, or even a combination of the two? Let’s revisit the pension options for Jack and Diane and see how these options compare.
When you elect an annuity with your pension accumulation, you are purchasing income with the value of your pension account. With a LIF, you are moving the value of your pension account (commuted value) to a personally owned vehicle from which you ...