Thanks to legislation passed last year, two new types of annuity will soon be available to Canadian retirees: advanced life deferred annuities (ALDAs) and variable payment life annuities (VPLAs) are designed to help counter the risk of retirees outliving their money.
ALDAs will allow retired clients to transfer up to 25% of the assets held in their RRSP or RRIF, to a maximum of $150,000, into an annuity that defers payments to the client — along with taxes on those payments — until the client reaches age 85. Reserving this portion of assets for later in retirement offsets longevity risk. At the same time, doing so lowers minimum RRIF withdrawals and taxable income earlier in retirement, reducing the likelihood of clawbacks on old age security and the guaranteed income supplement.
VPLAs are designed to increase yields by incorporating mortality credits and longevity-risk pooling into the plans. A client’s funds are pooled with those of other plan members and together invested in a portfolio of stocks and bonds. Payments are made to the plan members based on the performance of the pool. When a plan member dies, their assets remain in the VPLA so remaining members can continue to receive income.
These plans were introduced in Bill C-30, which received royal assent in June 2021. Industry participants are still seeking clarification on how exactly ALDAs and VPLAs will be regulated while awaiting provincial legislation that will allow these products to proceed.
As the legislation stands, VPLAs will be available only to clients with defined-contribution (DC) pension plans. There is growing consensus among industry organizations, economists and other stakeholders that the legislation should be amended to allow participation in VPLAs by all Canadians. As the Canadian Life and Health Insurance Association Inc. noted in a May 2022 submission to the Department of Finance, the legislation as currently enacted would benefit only a few thousand of the 500,000 Canadians set to retire each year.
“There are a few key criteria for making this work, and one of them is that you need enough people,” said Bonnie-Jeanne MacDonald, actuary and director of financial security research, with the National Institute on Ageing at Toronto Metropolitan University. Along with Keith Ambachtsheer, president of KPA Advisory Services Ltd. in Toronto, MacDonald led the coalition that brought about legislation allowing for VPLAs and ALDAs.
MacDonald, who is based in Halifax, would like to see more ways for all Canadians to buy into pooled plans. Options could include purchasing a mutual fund (Purpose Investments Inc. and Guardian Capital LP both offer longevity funds on the retail market that aren’t annuities); buying into a VPLA offered by a large insurer or a not-for-profit or government organization; or allowing non-employees to join large corporate DC plans. Alternatively, smaller employers could work together to create joint plans at scale, which could be administered in-house or by third parties, such as insurers.
Jordan Clark, assistant vice-president of insured wealth product with Sun Life Global Investments (Canada) Inc. in Waterloo, Ont., said Sun Life is “advocating for the introduction of a stand-alone VPLA that could be offered by insurers to broaden access and provide the required scale to optimize mortality pooling.”
Clark added that Sun Life would like to see ALDAs and VPLAs be made eligible investments for existing registered accounts such as TFSAs, a sentiment echoed by many stakeholders. Not only would this move help provide the scale necessary to make pooled plans successful, it also would provide retirees with a wider range of professionally managed options for investing retirement savings, MacDonald said.
MacDonald also would like more clarity on fiduciary responsibilities, as well as on the way these pooled products will be regulated. “There’s a fear that they would apply the same rules as they do to [defined-benefit] plans or annuities, which would severely undermine the purpose of these plans and run up their costs substantially.”
In the meantime, insurers, mutual fund companies and pension plan administrators “are going to have a lot of work to do” to educate not only clients but also financial advisors about these new options and to market them appropriately, said Moshe Milevsky, finance professor with the Schulich School of Business at York University in Toronto and the person who coined the term “ALDA” two decades ago.
Matthew Ardrey, vice-president, wealth advisor and portfolio manager with TriDelta Financial in Toronto, agrees. “I’m happy about anything the government comes out with that can give us options to [fund] retirement,” Ardrey said. Still, he’s not convinced that either offering will make a substantial impact on the Canadian retirement landscape.
An ALDA might make sense as a tax-saving strategy for a client with a “massive” RRSP or RRIF, Ardrey said. “It’s nice to have the option,” he said, “but it’s not going to be a retirement landscape game changer like the TFSA has been.”
Furthermore, he noted, the tax savings and income generated on the $160,000 maximum aren’t substantial, especially for retirees who may not want to gamble on living until age 85 and begin withdrawing the money sooner. As well, he noted, assets held in the ALDA are not eligible for spousal rollover; if a retiree dies, the balance in the annuity is taxable as income on the beneficiary’s return, which may make ALDAs less appealing to married and common-law couples than to those without a spouse.
ALDAs: Case in point
Matthew Ardrey, portfolio manager with TriDelta Financial in Toronto, cites the following hypothetical case to demonstrate the effectiveness — and limitations — of an advanced life deferred annuity: A 72-year-old client who has a $1-million RRIF would have to withdraw $54,000 in taxable income per year.
If the client maximized their ALDA, their RRIF withdrawal in the first year would drop by about $8,640 to $45,360, for example. The client would be able to defer taxes on that $8,640, and that reduction would reduce the clawback of government benefits, but those savings aren’t a game changer, Ardrey said.
When the client turns 85, they may still need the ALDA to last 10 years, meaning they would withdraw $16,000 a year, which Ardrey suggested may not be enough to fund their lifestyle.
“It’s not like you’re sitting here and saying, ‘I put $160,000 away and I’m golden,’” Ardrey said. “It’s ‘How much does it really minimize your RRIF, especially if you’re splitting those withdrawals with your spouse? How much is it really saving you in tax?’”