With low interest rates, fewer defined benefit pension plans and longer life expectancies, more people than ever are concerned about outliving their savings in retirement.
In fact, surveys indicate running out of money is the biggest fear of seniors, with some studies finding that many people consider it a fate worse than death itself.
Besides causing stress, worries about outliving your savings can cause retirees to live more frugally than they need to, sacrificing their quality of life and leaving an unintentionally large bequest to their heirs.
In response to these concerns, the federal government proposed in its 2019 budget the advanced life deferred annuity (ALDA).
What is an ALDA? Currently, you can use money in a registered fund, such as an RRSP, to buy an annuity that will provide you with regular, guaranteed payments for the rest of your life. The difference with an ALDA is that you pay for the annuity now, but only start collecting the payments later in life—as late as age 85.
Why is this advantageous? By delaying payments, you receive more income for your money than you would if you had started an annuity at 71—the age at which you must convert your RRSP to a registered retirement income fund (RRIF) or an annuity. This allows you to lock in a guaranteed stream of income later in life at a lower cost, giving you security and peace of mind throughout retirement.
There will also be tax deferral for Canadians who can afford to wait for the income. Your mandatory withdrawals from your RRIF would be reduced by putting money into an ALDA because its value will not be included in minimum withdrawal calculations. Also, higher income retirees may be able to reduce or eliminate the government’s clawback of Old Age Security (OAS) by reducing their minimum RRIF withdrawals in the period between 71 and 85 years old.
Scheduled to become available in 2020, the government proposes to permit you to use up to 25% of the value of a registered fund to purchase an annuity that begins payments, at the latest, by the end of the year you turn 85. There will be a lifetime maximum of $150,000 that will be indexed to inflation.
You will be able to purchase an ALDA with money you’re holding in several types of registered plans including RRSPs, RRIFs and defined contribution pension plans.
Clearly, an ALDA is not for everyone. Only half of Canadians will reach the age of 85 and many people won’t like the idea of handing over a chunk of their savings in return for payouts in a distant, uncertain future. Others will need to draw on their entire savings right away to fund their retirement.
But an ALDA could be a useful tool for retirees who expect to live to ripe old age, have no source of guaranteed retirement income other than the Canadian Pension Plan/Quebec Pension Plan and OAS, and don’t want to worry about market gyrations and outliving their savings in their final years.
However, the real-world benefits of ALDAs will depend on whether they are fairly priced by the insurance companies—the purveyors of annuities. This should be a key factor in deciding whether to buy one.
While ALDAs are a welcome addition to the retirement toolkit in Canada, the bottom line is that it will take careful analysis to decide whether it should be added to your financial plan for a secure, worry-free retirement. Since these have yet to be issued by any insurance companies, we’ll have to wait and see the fine print before being able to conduct the necessary analysis.
