Okay, so now your clients and prospects are now age 71. This is a significant age, because it is now time to do something with their RRSP’s that they have been saving for years. How they decide to take the income is very crucial at this stage.
Many questions should be addressed before a decision is made to take income.
Some of those may be:
• What age am I?
• What age is my spouse?
• How is our health?
• How much is my company pension?
• How much is my spouse’s pension?
• Do I take CPP at age 60 or 65?
• Will my spouse get CPP?
• Is it imperative that I leave an estate?
• What are my living expenses?
• Do I need more money now? Less later?
I’m sure that you can probably think of many more questions that should be asked to make sure that your clients / prospects are on the right track to a long and prosperous retirement.
A few short years ago, RRSP funds had to be deposited into a Life Annuity, Term Certain or a Registered Retirement Income Fund (RRIF).
Over the last few years, a new generation of RRSP variations has provided several attractive alternatives.
At a time when Canadians are healthier in retirement and are, in fact living longer than ever before, it is important that their incomes are every bit as healthy as they are and last just as long.
An increasing number of people are living beyond age 90. Below are some figures from the Canadian Institute of Actuaries that illustrates the probability of living beyond age 90 at various current ages.
Present Age
Probability of surviving beyond age 90
Males Females
60 31 in 100 46 in 100
65 31 in 100 46 in 100
70 31 in 100 46 in 100
75 34 in 100 47 in 100
80 41 in 100
The previous table illustrates that one-third of all males and almost one-half of all females retiring today can expect to live beyond age 90.
Most people find that an annuity, RRIF, or a combination will best meet their
retirement income needs. The choice, however, depends upon individual needs.
Let’s take a look at a few alternatives.
ANNUITIES
An annuity is a contract purchased with a lump sum of money TODAY in return for regular payments of this money (plus the interest earned) in the FUTURE. It provides a continuing and guaranteed income.
Types of annuities
Although there are many variations of annuities, most fall into two categories:
1. Annuities (Term) Certain
These types of annuities provide income payments for a specific guaranteed period, such as income for 10 or 15 years, or until the buyer reaches a specific age.
They are always based on only one annuitant. The payments are guaranteed for a specific number of installments.
When RRSP funds are used, the annuity must run until age 90 (or the annuitant may take a term certain which runs to their spouse’s age 90, if the spouse is younger). Once the period expires, the contract terminates.
Example
A 10-year annuity certain is finished after 10 years, even if the annuitant is still alive and in need of continuing income. If the annuitant dies before the end of the certain period, the annuitant’s estate or named beneficiary is entitled to the rest of the payments.
2. Life Annuities
These types of annuities can be set up with or without a guarantee period. They provide income payments for the annuitant’s lifetime. There can be single life annuities, which make annuity payments to the annuitant only during his or her lifetime. There can also be joint and last survivor annuities.
These types of annuities make payments to one annuitant until he or she dies and then to the spouse.
There can be a guaranteed period of any length (only age 90 for registered funds are allowed).
At death, the annuitant’s estate, unless a beneficiary has been named, will receive the remainder of the payments during the guaranteed period should the annuitant die during that period. If RRSP funds are used, and the annuitant dies, any remaining guaranteed payments must be communed, unless the beneficiary is the spouse.
Although we have described only a couple of different annuities, many more are available to suit your clients and prospects.
Many other variations of annuities
• Life annuity with no guarantees
• Life annuity with a guarantee
• Increasing life annuity
• Joint and last survivor annuity with no guaranteed period (full income to survivor)
• Joint and last survivor annuity with a guaranteed period
• Joint and last survivor with income reducing
• Increasing joint and last survivor annuity
• Integrated annuity
• Impaired annuity
• Commutable annuities
Life annuities and annuities certain can be either immediate or deferred payments. With immediate annuities, the income payments to the individual usually will start exactly one installment period after the institution receives the funds. With a deferred annuity, the income commences more than one
installment frequency after the funds are received. Usually, this commencement date is a number of years in the future.
Deferred annuities are usually for non-registered funds. For registered funds, Revenue Canada says that the individual must receive one entire year of payments in the year they reach age 72.
How are annuities taxed?
While Living
When we are dealing with registered funds, the total of the payments received in any given year must be included as income in the year received.
At Death
Where the annuity is joint and last survivor or the spouse is the named beneficiary, the guaranteed annuity payments will continue to be paid to the spouse and will be taxed as received. Otherwise if the commuted value of any remaining guaranteed annuity payments exceeds the dependents allowable limits, it will be taxed on the final return of the deceased annuitant.
Some key points to remember about annuities
When determining life annuity incomes, a number of factors are considered:
Interest, mortality and expense rates, the annuity option selected, the amount of the funds, and when the first payment starts. Annuity certain annuities are influenced by the same factors, with the exception of mortality rates.
A single annuity with no guarantee usually offers the highest monthly income.
However, if annuitants die shortly after purchasing this plan, no benefits are available to their estates. A longer guarantee period or the addition of a joint and last survivor option will lower the monthly income, but also provide more assurance of income for the surviving spouse or estate.
Your client’s age, health, lifestyle, income needs and the needs of their spouse and dependents should all be considered in recommending an annuity option.
Asking a few disturbing questions in consideration of these important points will earn your client’s respect and result in sales for you
Clients should consider an annuity if they want the security of knowing exactly what their income will be for the full term. If they do not want to make any more investment decisions, and want to lock in current interest rates then this is the best option for them.