As Canadians’ life expectancies get longer, the importance of having sufficient and consistent income through retirement is becoming clear. In addressing the challenge, retirees have to find a balance between saving enough to avoid being destitute and being able to enjoy the resources and assets they worked so hard for.
That’s one reason why guaranteed income annuities have not been a popular choice. “Many worry about dying early and not getting their money's worth,” noted a report by CBC News. “[A]nd compared with the amount of income generated in the old days of high interest rates, annuities are expensive.”
But the stage is set for new cost-effective ways to get lifetime income. Known as Advanced Life Deferred Annuities (ALDAs) and Variable Payment Life Annuities (VPLAs), they allow people to better control most of their money and minimize the portion savings they’d lose to an insurance company in case they die earlier than expected.
“The peace of mind that it would give to people and all the other things, it's a really neat solution," said Bonnie-Jean MacDonald, director of financial security research at Ryerson University's National Institute on Ageing.
The new options, which MacDonald and other retirement experts had spent years lobbying for, were introduced to little fanfare in the recent federal budget. The changes allowing the new products will likely take effect in 2020.
“The traditional defined benefit plans are dying in the private sector and being replaced by defined contribution plans, group RRSPs, and individual RRSPs,” said Keith Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management. “These do not have 'income for life' back ends, leaving people with the risk of outliving their retirement savings.”
With ALDAs and VPLA, retirees have an extra cushion ensuring that they will not outlive their income — and they cost less than traditional annuities. As an example, CBC News noted that a 65-year-old woman who uses $500,000 in retirement savings to buy an annuity could immediately begin collecting annual pre-tax lifetime income of around $28,000, based on Sun Life Financial’s annuity calculator.
An ALDA could generate the same income at around one-tenth of the cost. But unlike with traditional annuities, the income payments won’t take effect until and unless the woman reaches the age of 85. Only around half of Canadians will reportedly live past 85, and the ones who do benefit from the ones who don’t.
But with that guarantee of income later in life, relatively young retirees will have more freedom to spend the bulk of their retirement savings as they like while they’re able to do so. “[B] y age 85 people are usually much more sedentary, they're not going to be travelling, their costs are going to be more regular and so it's a great fall-back to give them that peace of mind,” MacDonald said.
VPLAs, meanwhile, could be bought by Canadians from pooled retirement plans or defined-contribution pension plans. Unlike traditional annuities, the income from VPLAs will vary as the size of the payments depends on the markets. But because they rely on pooled investments, VPLAs still tend to be far more stable than individual investments.