By Jamie Golombek and Debbie Pearl-Weinberg
The 2019 federal budget announced a few measures directed at retirees. Included in these measures was the introduction of two new types of annuities starting in 2020: advanced life deferred annuities (ALDA) and variable payment life annuities (VLPA). Both of these new life annuities will be based on the life of the annuitant, and possibly their spouse or common-law partner. Draft legislation was not released with the budget documents, but a general description was included.
An ALDA will provide a form of stand-alone longevity insurance, which provides insurance in the event that a person lives longer than expected. It is generally a deferred annuity, where payments are received for life, but start at a predetermined later age. An ALDA will be an option for clients to purchase with funds from most registered plans aimed at retirement savings: registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), deferred profit sharing plans (DPSPs), pooled retirement pension plans (PRPPs), and defined contribution registered pension plans (RPPs). This deferred annuity will guarantee the payment of a fixed annual amount until death, with very limited increases available. Payments to a surviving spouse or common-law partner must be at a reduced rate, presumably as less funds should be needed to support only the survivor. Payments from an ALDA can be deferred past age 71, but must begin no later than the end of the year that the annuitant turns 85. This is the longevity protection should the annuitant live past age 85. There are, however, limits on the amount of retirement savings that can be allocated to an ALDA. No more than 25 per cent of the value of any particular plan can be invested in an ALDA. In addition, a lifetime ALDA limit of $150,000 will apply, indexed to inflation (rounded to the nearest $10,000).
A VLPA will be a new option for members of PRPPs and defined contribution RPPs. In-plan annuities, where annuities are directly provided from a PRPP or RPP, are not currently an option for these pension plan members. The future VLPA will be established by the pension plan administrator as a separate annuities fund, and will receive transfers from the members’ accounts within the pension plan. Payments from a VLPA will initially be based on the amount transferred in accordance with generally accepted actuarial principles. However, in addition to very limited increases based on for instance, changes to the Consumer Price Index, payments will also be adjusted annually based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants. There must be a minimum of 10 retired members before a VPLA can be established. Unlike the ALDA, payments from a VLPA cannot be deferred past age 71 when the annuitant is under age 71. A minimum guarantee period will be permitted.
There was some previous support for the establishment of stand-alone longevity insurance. In a September 2018 C.D. Howe Institute report entitled Making the Money Last: The Case for Offering Pure Longevity Insurance to Retiring Canadians, David Don Ezra advocated that there was a need for tax changes to accommodate stand-alone longevity insurance. Ezra cited studies indicating that many retirees fear outliving their savings. This in turn may result in behavioural changes where relatively young retirees live a reduced retirement lifestyle out of an abundance of caution. Ezra felt that longevity insurance, where retirees pool the risk of outliving savings, may lead to some retirees more fully enjoying early retirement at a time when they are in good health. It is notable that the United States similarly introduced a form of longevity insurance in 2014 called qualifying longevity annuity contracts (”QLAC”) for funds in either a 401(k) or an IRA. As of 2019, the lifetime limit for a QLAC is $130,000.
It is unclear whether clients will be interested in these new annuities as part of an overall retirement plan. In a January 2019 CIBC Retirement Poll, only 11 per cent of respondents anticipated using an annuity in retirement. We may expect that the ALDA would appeal to a smaller subset of retirees, as those with limited retirement funds may not be able to wait past age 71 to start receiving income from a portion of their retirement assets. In addition, Statistics Canada puts the life expectancy for a 70-year-old at 85 years of age.
If there is client interest in ALDAs and VPLAs, both industry and government work will be required. A particular plan agreement for RRSPs and RRIFs may require amendments before an ALDA can be held as an investment within the RRSP or RRIF. Before VPLAs can be offered, applicable pension legislation may need changes to accommodate purchases from pension plans. We anticipate that for both annuity types, it will take some time before pricing for products being offered is available from insurance providers.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is managing director, tax and estate planning, with CIBC Financial Planning and Advice in Toronto. Debbie Pearl-Weinberg, LLB, is executive director, tax and estate planning, with CIBC Financial Planning and Advice in Toronto.