Personal Finance

Retirement Planning - Federal Budget 2019 changes

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  • Jul 16th, 2019 10:31 pm
[OP]
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Retirement Planning - Federal Budget 2019 changes

https://crowemackay.ca/tax-letters/fede ... w-Original
Hello, this is an article from last week summarizing some changes in the budget.

What caught my eye was the introduction of Advanced Life Deferred Annuities and Variable Payment Life Annuities

ALDAs will be available for inclusion in RIFs starting in 2020. This will allow Canadians to convert up to 25% of their RRSP assets into a deferred annuity that starts paying out at age 86. Currently, Retirees need convert to a RRIF and start withdrawing (and paying tax) at 71. This opens up an extra 15 years of tax deferral for most individuals, and for those receiving OAS will potentially prevent a lot of clawback because the mandatory withdrawal is based on at most 75% of the total RSP value, not 100%. It also, being an annuity, helps add to the fixed income base for retirees over the age of 85, so combined with CPP expansion should have a significant effect on senior poverty in Canada.

VPLAs are going to be even more interesting, and I suspect, controversial. They are basically tontines. If you're ok gambling on your own mortality, you'll get a lot more bang for your buck, but if you die your heirs get nothing. For the taxpayer, this might be an idea that can incentivize people to stay healthy, reducing strain on our universal medicare system. Afaik, the UBC faculty plan is the only currently operating VLPA in Canada. Details on how it works can be found here: https://faculty.pensions.ubc.ca/files/2 ... uities.pdf.

Any thoughts? If the ALDAs are easily cashable upon death and the return is decent for heirs, I think it's going to be a no brainer for the top quintile of earners who normally depend on RRSPs. VLPAs will allow seniors to insure against outliving their money, at the expense of forfeiting that portion of their estate.
Last edited by danishh on Apr 12th, 2019 10:36 am, edited 1 time in total.
12 replies
[OP]
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Jul 25, 2008
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ottawa
ok, I found another article:
https://www.timescolonist.com/opinion/o ... 1.23782537
But these latter methods lack one critical element. They do not pay a lifetime pension income. That is left to the individual worker to manage. That worker has two alternatives: Buy a relatively expensive life annuity about age 65 or withdraw funds on a basis that is meant to last a lifetime but might not or might mean that you have drawn down too conservatively and are living at a standard of living way below what you could afford. The problem is that no individual can accurately predict their own life expectancy.

But there are two proposals buried in the federal budget from March 16 that could go a long way to mitigate these problems.

The first proposal is called an Advanced Life Deferred Annuity. Today, if you have a registered fund, you must start to take income out by the end of the year that you turn 71. With ALDA, you could defer payments to the end of the year you turn 85. You could use up to 25 per cent of your registered retirement holdings for a maximum lifetime dollar value of $250,000. Income tax would not apply until the income is taken.
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I think the 'maximum lifetime dollar value' $250,000 quoted is incorrect - should be $150,000. Also, it may not be clear that age 85 is the maximum deferral. You could defer the payments to age 75 or 80, for example, if that makes more sense for you.
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Apr 18, 2013
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It'll be interesting to see how Bill Morneau's firm benefits from this new annuity.
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akaManny wrote:
Jul 14th, 2019 4:13 pm
I think the 'maximum lifetime dollar value' $250,000 quoted is incorrect - should be $150,000. Also, it may not be clear that age 85 is the maximum deferral. You could defer the payments to age 75 or 80, for example, if that makes more sense for you.
No, it reads as if the payments start after age 85 to me. I guess it could be okay for those expecting to live to 100, but I'm not betting on that. I'll just manage my own money.
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danishh wrote:
Apr 9th, 2019 1:58 pm
Any thoughts? If the ALDAs are easily cashable upon death and the return is decent for heirs, I think it's going to be a no brainer for the top quintile of earners who normally depend on RRSPs. VLPAs will allow seniors to insure against outliving their money, at the expense of forfeiting that portion of their estate.
An ALDA is more insurance against longevity and outliving your savings than investment. An ALDA will not have any cash surrender value on death, it might pay out a death benefit of some amount but not likely to pay back much of the premiums paid on the annuity or the investment earned on the premiums.

2 ways of ensuring you have money set aside to ensure that you have enough at 85 so you don't outlive your savings: self-insure or buy a life annuity

With self-insuring, you set aside your own personal old age fund.

If you put aside $23,700 in the fund at age 60 and invested it at 5% per year, you’d have about $80,000 by age 85. You could take the $80,000 to buy a life annuity that paid $1,000 a month for life to cover risk of longevity at 85. If you died before age 85, your heirs would get the entire fund.

With an ALDA, you’d buy an annuity for $16,000 at age 60 for a lifetime income of $1,000 starting at age 85. So, instead of putting aside $23,000, you only have to set aside $16,000 for a saving of $7,700. If you died before age 85, your heirs may be paid some of premium paid (depending upon the life annuity purchased) but won't be getting any of returns earned on the premium.

Why is the ALDA cheaper than self-insuring? For the same reason that homeowner’s insurance is cheaper than paying for damage to your home: because most homeowners never file a claim, and their premiums are used to reimburse the few who do. Similarly, the premiums of the ALDA owners who don’t reach age 85 — and never file a “claim” — go to pay for the ones who do. Life annuities as an option when converting an RRSP is not popular for a lot of people as people don't like the idea that they will lose the amount of the "investment" they put up to purchase the annuity, (that is the $16,000 in the example above) if they died early and don't ever collect. All an ALDA does is allow the deferral of a payout from a RRIF up to age 85 rather than starting right away as with the current rules.

There is no free money, it's just another way of deferring taxable money to later years but it's not really an investment option.
[OP]
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Jon Chevreau had a column on moneysense in May addressing these two options:
https://www.moneysense.ca/columns/retir ... he-answer/

I still think for very large RRSPs, with long life expectancy, there's a tax arbitrage opportunity buying ALDAs with pre-tax money while deferring minimum RRIF withdrawals that eat up capital with taxes. Yes, it only applies to those who already have plenty of money, but it should be attractive to the right client.
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For people who want a forced, pre-determined way of getting money in the old age, ALDA might make sense. For me, I'd rather get the money out of RRSP before they have to be converted to RRIF or ALDA, etc.
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Annuities are for suckers
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Chickinvic wrote:
Jul 16th, 2019 11:48 am
No, it reads as if the payments start after age 85 to me. I guess it could be okay for those expecting to live to 100, but I'm not betting on that. I'll just manage my own money.
The article may read that way, but the proposed ALDA is not so restrictive. From another article:
"Unlike existing annuity products that can also be purchased with funds transferred from retirement savings vehicles, annuity payments under an ALDA can begin at any time before the end of the year the annuitant turns age 85, rather than the end of the year the annuitant turns age 71. "

https://hicksmorley.com/2019/03/22/fede ... -everyone/
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Cavegirl wrote:
Jul 16th, 2019 3:08 pm
...For me, I'd rather get the money out of RRSP before they have to be converted to RRIF or ALDA, etc.
Yes, but if you are still in your highest income earning years, you likely will pay more tax up front plus OAS clawback when you collapse your RRSP. An annuity is a way of hedging, and the ALDA is a deferred annuity limited to 25% / $150,000 of your registered funds. If you are not concerned about how much you leave for your heirs, this or any annuity may be appropriate.
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Oct 17, 2014
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Cavegirl wrote:
Jul 16th, 2019 3:08 pm
For people who want a forced, pre-determined way of getting money in the old age, ALDA might make sense. For me, I'd rather get the money out of RRSP before they have to be converted to RRIF or ALDA, etc.
Totally agree! I'm in the process of collapsing my RRSP before age 72 -- Free my money so I could enjoy my retirement whatever way I want when I'm still healthy.

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