With many senior Canadians fearing that they may outlive their retirement funds, a recent focus has shifted towards managing longevity risk. Annuities have a long history of providing guaranteed lifetime income that you cannot outlive and are often used to manage the concerns regarding guaranteed income and longevity risk. With this in mind, two new annuity options have been proposed in the March 2019 Federal Budget to help consumers. If approved, the annuity options would be available for consumers starting in 2020.
Proposed New Annuity Options in the 2019 Federal Budget
Advanced Life Deferred Annuity (ALDA)
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Defined Contribution Registered Pension Plans (RPPs)
- Deferred Profit Sharing Plans (DPSPs)
- Pooled Registered Pension Plans (PRPPs)
Currently, tax rules for these types of registered funds require they be converted into an income vehicle starting no later than the end of the year in which the owner/member turns age 71. The proposed option for an Advanced Life Deferred Annuity (ALDA) would allow for a further deferral of income, as the commencement of the “annuity” could be deferred up to the end of the year in which the annuitant reaches age 85.
Another benefit would be that the value of the funds used to purchase an ALDA would not be included in the calculation of the required minimum withdrawals, based on the amount held in individual RRIFs and or a member’s pension funds.
The value or amount available to transfer to an ALDA will be limited to 25% of the registered account value (at the end of the previous year, plus any amounts already used to buy an ALDA in the previous year) and a comprehensive or overall lifetime limit will initially be set at $150,000 from all qualifying plans. The lifetime ALDA dollar limit will be indexed to inflation after 2020 and rounded to the nearest $10,000. Excess contributions would be subject to a 1% per month penalty tax and the annuity cannot provide other benefits such as commutation, cash surrender payments or payments under a guarantee period.
Variable Payment Life Annuity (VPLA)
This option will only be available to members of defined contribution Registered Pension Plans (RPP) and Pooled Registered Pension Plans (PRPP). The current options for members of these plans are to:
- take variable benefits from the plan;
- transfer the balance to a locked-in RRSP or RRIF; or
- purchase a life annuity from a licensed annuity provider, usually an insurance company.
The proposed changes will allow members of the pension plan (RPP or PRPP) to obtain a Variable Payment Life Annuity (VPLA) directly from the plan. As the name would suggest, income payments of the VPLA will vary depending on the investment performance of the underlying fund assets and the mortality experience of the VPLA annuitants in the plan. Plan members will only be able to acquire a VPLA by transferring money from their existing PRPP or defined contribution RPP. VPLAs are not available for purchase directly by consumers and a number of rules will apply to this type of plan.
For more information, contact your Odlum Brown Investment Advisor or Portfolio Manager.
* Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.