From the Editor: Live Long and Prosper?

Q1 | April 2019

Laptop, notebook, Tablet and coffee on work desk

Topic: Wealth Planning

Dianne C. White, CPA, CA, CFP, TEP

April 8, 2019

Image used with permission: iStock/PRImageFactory


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From the Editor: Live Long and Prosper?

Q1 | April 2019

The 2019 Federal Budget content was not particularly newsworthy from a tax perspective. There were no tax rate reductions or any commitment to a comprehensive tax review or reform. However, one change worth some discussion is the introduction of the Advanced Life Deferred Annuity (ALDA) for registered plans.

There has been pressure on the government in recent years to increase (from 71) the age required to start withdrawing funds from registered retirement savings plans. The reasoning is twofold: life expectancy has increased and interest rates have fallen. There is a concern that Canadians will outlive their retirement savings. The ALDA is an attempt to help retirees live long and prosper.

Starting in 2020, an ALDA will be an investment option available to anyone with a RRSP, RRIF or other similar deferred plans like a defined contribution pension plan (DCPP). Annuities are not a new investment for registered plan holders. Anyone with a registered plan can take a lump sum of cash from their registered account and purchase a monthly or annual annuity from an insurance company. The difference with the ALDA is that payments begin at the latest by the end of the year that you turn 85, instead of 72. The other catch with the ALDA is that you are only allowed to invest 25% of your registered accounts, up to a lifetime maximum of $150,000.

Annuities have not been a popular retirement vehicle in recent years for a few reasons, but most notably in the last few decades, because of the low interest rate environment (resulting in lower payments) and the absence of inflation protection. So why would anyone want to buy an annuity to defer an income stream starting at age 85? Especially considering there are also merits to making early withdrawals from your RRSP that I recently wrote about in my blog Cashing in Before 71? When Early RRSP Withdrawals Make Sense.

The ALDA is likely to be a good vehicle for retirees who have a conservative investment portfolio or low risk tolerance. This means that they do not have the capacity to bear risk if they live a long life because they do not have sufficient retirement savings to cover shortfalls from unpredictable markets. It might also mean they don’t like uncertainty and may sleep better at night knowing they have locked in a guaranteed income stream at age 85 with no volatility.

There is also a possible tax reduction or tax smoothing opportunity with an ALDA. If money is removed from an existing RRIF account and put into an ALDA, this could reduce the minimum RRIF withdrawal requirement between age 72 and age 85. This could be an attractive deferral opportunity for someone continuing to work in their 70’s or having other retirement income sources and therefore paying a higher tax rate earlier than they expect to be paying in the future. It might also help reduce or prevent the OAS clawback for retirees with higher income in their early years of retirement.

It will be interesting to see how the ALDA gets used when it becomes available and how the insurance companies will price these investment products.

In this issue of Nexus Notes you will find an article about client communications and striking the right balance between doing right by clients and providing a high level of client service. It seems that less may, in fact, be more. We are also featuring a recent blog about investing in emerging markets and why we think there is opportunity despite the Aguas Tormentosas associated with these investments.

Happy Spring!

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