Annuities

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
cnicole
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Re: Annuities

Post by cnicole »

Thanks everyone for your comments. I definitely have to do more research on annuities. I think I'll take Altared's comments i think differently then other government workers as a compliment. A lot of government workers are pretty complacent.
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Re: Annuities

Post by cnicole »

Thanks Bruce, lots to read. It is in the plan text we can take the commuted value or annuity.
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Re: Annuities

Post by Peculiar_Investor »

cnicole wrote: 17 Feb 2018 00:45 Thanks Bruce, lots to read. It is in the plan text we can take the commuted value or annuity.
Many longtimers on FWF know Bruce's background, but just in case the OP or others don't know about it. Bruce is one of the co-authors of The Pension Puzzle: Your Complete Guide to Government Benefits, RRSPs, and Employer Plans, so he knows a little bit :wink: about pensions, i.e. he's one of our resident experts.

While Googling for the book I turned up Download worksheets (PDFs) from the publisher's website.
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Re: Annuities

Post by cnicole »

Thanks. I'll have to check out the book. I'm just wondering why they offer this annuity option at all. It seems a little strange.
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Re: Annuities

Post by GreatLaker »

brucecohen wrote: 17 Feb 2018 00:27
cnicole wrote: 16 Feb 2018 18:52 In my plan the commuted value or annuity option is available when you retire. I've confirmed this with hr.
I doubt that very much and suggest you ask the pension plan's administrator or, better yet, check the member materials published by the pension plan. DB plans are able to guarantee benefits for life largely because retirees who die before the plan's average life expectancy subsidize those who outlive the table. Allowing retirees to take commuted value would undermine this because people with medical conditions that are likely to shorten life would take the CV in order to bolster their estate.

The HR person might have had the following ploy in mind. It's not widely done but is also not uncommon. Just before hitting the early retirement age -- usually 55 -- you resign from your job and commute your pension. You then return to work as a contract employee. I've never seen a DB plan that allows commutation after the early retirement age.
I was in a private sector DB plan that allowed quitting or retiring employees to take a commuted value at any age. I took it at age 59 because it was an underfunded pension with a cr@ppily run Canadian company that got purchased by a cr@ppy US company that did not seem to even know what a DB pension was, or understand the concept of solvency funding.

Bruce I do understand the ploy you mentioned because at some point the rules for the pension changed. Old timers at the company talked about the 54-11/12 option of retiring 1 month before age 55 to enable taking the CV at retirement. I hope none of them chose that option because none of the ones that talked about it likely could have ever invested the CV to match what their pension would pay.

CBC published an article on how Halifax Regional Municipality was changing their pension rules in 2016 to prevent taking the CV at age 55 or older because so few retirees had the ability to manage it properly. The retiree described in the article was a particularly egregious example, renovating his home, buying his son a home and buying 2 new cars then lamenting that his pension CV was not enough to live on.
http://www.cbc.ca/news/canada/nova-scot ... -1.3614880

I do know for sure that OPTrust (OPSEU pension) does not allow taking the CV at or after age 55.

P.S. Bruce your book the Pension Puzzle is really good.
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Re: Annuities

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That's a sad tale indeed.

I met a couple of retired teachers this winter who did a similar maneuver and commuted the value of their OTPP DB plan. She was 55 when she did it and said that it was something that she "had" to do, so I have no idea of the backstory that would motivate such a questionable strategy. She then proceeded to work as a supply teacher for the next 10 years, so there must have been some need for a large chunk of cash that couldn't be obtained from remortgaging a house.

Her and her husband, both retired high school teachers, are now 70 and he still works part-time, so their financial situation is far from ideal one would surmise and this is with a couple that once were members of one of the most enviable pension plans in this country. It never ceases to amaze me the capacity of well educated adults to make questionable if not ruinous decisions when it comes to finances. It's like the dark arts and the naivety of greed that entraps the poorly informed. :?
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Re: Annuities

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I couldn't believe it but the receptionist at my work apparently has no rrsps and is completely reliant on her pension. She is thinking of moving back to saskatchewan as she thinks it will be cheaper then vancouver to live. I think she spent her rrsp money on smoking.
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Re: Annuities

Post by cnicole »

I found a sunlife booklet on transferring a pension to an annuity. The annuity and pension can't be materially different or cra will tax the full commuted value amount. Ouch.
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Re: Annuities

Post by brucecohen »

scomac wrote: 17 Feb 2018 16:07 Her and her husband, both retired high school teachers, are now 70 and he still works part-time, so their financial situation is far from ideal one would surmise and this is with a couple that once were members of one of the most enviable pension plans in this country.
If he was a career teacher he might be working just to keep busy or they might have suffered a gigantic loss. A long service OTPP pension should be enough for a couple to live comfortably, especially if the guy taught high school where salaries are higher. During the flurry of OTPP commutations years ago I heard about only one case that made sense. A couple were both principals and their pensions totaled far more than they could spend. So one commuted to build an estate for their kids.
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Re: Annuities

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brucecohen wrote: 18 Feb 2018 13:49 During the flurry of OTPP commutations years ago I heard about only one case that made sense. A couple were both principals and their pensions totaled far more than they could spend. So one commuted to build an estate for their kids.
Evrn there, collecting the pension and investing it for the estate would have been an option. Tax considerations would have played a large role in deciding which way to go. I suspect that in most cases, receiving and investing the pension would be more tax-efficient.

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Re: Annuities

Post by scomac »

brucecohen wrote: 18 Feb 2018 13:49
scomac wrote: 17 Feb 2018 16:07 Her and her husband, both retired high school teachers, are now 70 and he still works part-time, so their financial situation is far from ideal one would surmise and this is with a couple that once were members of one of the most enviable pension plans in this country.
If he was a career teacher he might be working just to keep busy or they might have suffered a gigantic loss. A long service OTPP pension should be enough for a couple to live comfortably, especially if the guy taught high school where salaries are higher. During the flurry of OTPP commutations years ago I heard about only one case that made sense. A couple were both principals and their pensions totaled far more than they could spend. So one commuted to build an estate for their kids.
Both were high school teachers and she was a department head. When she told me this tale I'm sure that my jaw must have gaped and hit the table top that we were sitting at!

Why does her husband still work? I won't speculate beyond a financial need because of when he works and how it interferes with his once-a-week recreation of curling. She has complained that he should get a break on membership fees because he only gets to play half the time. So pick another day to play! None of this makes any sense to me other than the situation is out of his control, ie. need

The problem is that we don't have enough information to know why they did what they did and how their situation is now versus having opted to stay in the pension plan, but i just shake my head at how people can do really dumb things with this being one of the dumbest I've run across. The real kicker to all this was that the husband was a business teacher... :roll:
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Re: Annuities

Post by Jaunty »

There was a flurry of OTPP pensions being commuted in the Niagara area in the late 90's - enough that it caught the provincial federations' attention. There were "advisers" who seemed to spring out of the woodwork to help the commuters. One very successful adviser (ie lots of clients) could only invest the funds in one insurance company's products, I believe it was because he didn't hold any certification for any other products. I do not know what the market mix of he investments was, and of course they would vary from individual to individual, but the market tanked shortly after many had invested. Acquaintances moan and groan about how badly their investments have done and some have returned to part time work - and not likely because they want to. I believe all the folks I know who commuted with this adviser - and there are lots I don't know - have left for other pastures. I understand that he became harder, but not impossible to contact, as he spent lots of time at a condo in Hawaii he had bought with part of his take.
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Re: Annuities

Post by Rysto »

cnicole wrote: 17 Feb 2018 16:29I think she spent her rrsp money on smoking.
Smoking is underrated as a hedge against longevity risk.
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Re: Annuities

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Rysto wrote: 21 Feb 2018 12:56
cnicole wrote: 17 Feb 2018 16:29I think she spent her rrsp money on smoking.
Smoking is underrated as a hedge against longevity risk.
I don't know about that. MIL was a lifetime smoker and only died at 93.
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Re: Annuities

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Rysto wrote: 21 Feb 2018 12:56
cnicole wrote: 17 Feb 2018 16:29I think she spent her rrsp money on smoking.
Smoking is underrated as a hedge against longevity risk.
:rofl:
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Re: Annuities

Post by kumquat »

Maybe there should be a financial literacy test if you want the CV of your DB pension.
I don't intend to offend anyone, that part is just a bonus.

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Re: Annuities

Post by cnicole »

Just a note that i read the eckler article (not union propoganda) and it says the difference with a target benefit plan is accrued benefits can be changed. There seems to be a misconception by some people that this is just a union scare tactic.

Eckler is a prominent pension consulting firm thr article was posted by Bruce Cohen.
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Re: Annuities

Post by brucecohen »

cnicole wrote: 03 Mar 2018 12:27 Just a note that i read the eckler article (not union propoganda) and it says the difference with a target benefit plan is accrued benefits can be changed. There seems to be a misconception by some people that this is just a union scare tactic.
I assume you're referencing this statement:

The key design feature of TBPs is that the
benefit formula is a target that can be adjusted
up or down based on the plan’s funded
status. This means it’s possible to reduce
both future and accrued benefits in order to
eliminate funding deficiencies, whereas DB
plan deficiencies can only be eliminated by
increasing contributions or reducing future
benefits.


TBP is an attempt to create a DB-DC hybrid:
-- A DB pension plan defines the benefit, the funding needed to get there is the sole responsibility of the sponsor unless the plan is jointly sponsored with employees through their union(s), and reducing the promised benefit is extremely hard or even impossible. So, the amount of retirement income is predictable unless the sponsor goes bust.
-- A DC plan defines only the contributions made by the sponsor, a minimum of 1% of covered earnings. The sponsor offers no assurance about account performance and the level of retirement income. DC transfers all risk to employees.
-- TBP sets a target level of retirement income and the sponsor commits to trying to meet that target, but there is no guarantee as with DB. I assume that what happens where there is a shortfall will depend on bargaining between sponsor and union(s) when the plan is established. Obviously there would have to be increased contributions, reduced benefits or some combination of the two.

30 years ago I was in what might have been Canada's first attempt to create a TBP. My employer was a very paternalistic company with a non-contributory 1% DB plan. As the company expanded outside Ontario its pension regulatory burden soared. So it turned to a pension consulting firm which created a TBP using a group RRSP platform. It was called TRIPP (Targeted Retirement Investment Plan. I don't remember what the second P stood for.) Each employee was offered a choice between staying in the DB plan or joining TRIPP for new service; at that time accrued DB credits could not be transferred over. Either way the company paid the full cost. TRIPP's accrual rate was 1.5%. Since the law did not provide for TBPs, TRIPP was a group RRSP and employees who joined had to agree to leave the money untouched until age 55. The company chose one balanced mutual fund as the investment vehicle and planned to switch to a lower cost pooled fund once the plan had enough money. IIRC, the plan called for gradual transfer of an individual's money to a bond fund starting five years before retirement with purchase of a life annuity on R-day. This was a non-union workplace and employees were quite divided though I don't know the actual split. I joined TRIPP because I did not expect to stay with the company until retirement. As luck would have it, I did well because my account was in surplus when I quit and I got to keep that extra money. That was pure luck. A few years later others were very happy with their decision to stay DB because the TRIPP accounts got hammered in a market downturn. Ultimately, TRIPP was scrapped as the company changed hands several times. The DB plan was closed to new members when TRIPP was launched and still exists but with a membership that is slowly declining.
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Re: Annuities

Post by DenisD »

Interest rates have gone up in the past year. Hopefully, annuity payments have gone up as well. Or are the insurance companies as stingy as the banks? I copied some rates from https://lifeannuities.com to find out. I'm comparing rates from February 12 of this year to January 9 of last year. Rates are monthly for single men with no guarantee period from $100,000 of registered funds.

Code: Select all

                          17/01/09                   18/02/12                  Difference     
Company           Age 65   Age 70   Age 75   Age 65   Age 70   Age 75   Age 65   Age 70   Age 75
BMO Insurance        527      627      773      545      639      731       18       12      -42
Canada Life          511      602               509      592                -2      -10
Desjardins Fin.      520      616      725      527      610      729        7       -5        4
Empire Life          509      591      700      514      596      704        5        5        4
Great-West Life      511      602               509      592                -2      -10
Manulife             500      585      712      505      577      704        5       -8       -8
RBC Insurance        520      623      771      531      629      747       11        7      -24
Sun Life             517      614      732      541      637      754       24       23       22

Average              514      608      736      523      609      728        8        2       -7
Maximum              527      627      773      545      639      754       18       12      -19
Looks like 65 or 70-year-olds can get a bit more this year. But 75-year-olds were better off last year.
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Re: Annuities

Post by Eclectic12 »

cnicole wrote: 17 Feb 2018 16:29 I couldn't believe it but the receptionist at my work apparently has no rrsps and is completely reliant on her pension. She is thinking of moving back to saskatchewan as she thinks it will be cheaper then vancouver to live. I think she spent her rrsp money on smoking.
A particularly bad example but sadly ... not that uncommon.

When the company I worked for invited employees who were not eligible for the new DC pension to the "Should You Switch from the DB to DC pension?" info session, the woman beside me gasped. The slide outlining that with many years of service, the best one could do was 60% of salary (I am simplifying the formula) was up where she commented "I won't get 100% of my salary?"

While trying to discuss the pros/cons of switching - another co-worker said "It is too complicated to work out - if I am short of money in retirement, I will beg on the street".

It was moot where we should not have been invited as the DC pension was available only for managers and above. We had a DB pension while those hired two weeks or more after us had no pension.


Not much has changed as several studies have shown that educating people that by joining the company plan that has matching, one is doubling their contributions made no difference to plan participation rates (i.e. people were skipping free money). What did change the participation rates was automatic enrollment where the employee had to opt out.


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Re: Annuities

Post by cnicole »

Does anyone know if you can buy prescribed annuities with the proceeds from the unregistered portion of a commuted value payout? I can't find any info about this online.

Actually i was thinking of prescribed annuities to minimize paying tax but if you were able you could manipulate your end date so you had a smaller income that year so you'd pay less tax.
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Re: Annuities

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cnicole wrote: 18 Mar 2018 15:28 Does anyone know if you can buy prescribed annuities with the proceeds from the unregistered portion of a commuted value payout? I can't find any info about this online.

Actually i was thinking of prescribed annuities to minimize paying tax
There's nothing special about the unregistered (taxable) portion of a commuted value. Once you pay the tax you can do whatever you want with it. A prescribed annuity levels the blend of taxable interest and tax-free return of capital over your life expectancy. So you pay less tax until the table turns, though many/most people don't live long enough to start facing meaningful catch-up tax. A year ot two ago Ottawa updated the life expectancy table so the deal is not as good as it used to be, but I think the current table still lags the reality of increased longevity. Note that a prescribed annuity can't be inflation-indexed.
but if you were able you could manipulate your end date so you had a smaller income that year so you'd pay less tax.
I don't understand what you mean. A prescribed annuity is a life annuity that runs until you don't.
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Re: Annuities

Post by cnicole »

Thanks. It sounds like the commuted value is taxed and then taxed again if you buy a prescribed annuity so i'm not sure if this is such a good idea. You almost need a tax accountant to sort out what would be best.

I was just thinking it is to your benefit to retire earlier in the tax year so the commuted value would be taxed at a lower rate.
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Re: Annuities

Post by brucecohen »

cnicole wrote: 18 Mar 2018 17:32 Thanks. It sounds like the commuted value is taxed and then taxed again if you buy a prescribed annuity
It's only taxed once. If you buy an annuity the return of capital is tax-free and you're taxed only on the interest received. Just like a bond or GIC (except that capital remaining at time of death is left in the annuity pool).
I was just thinking it is to your benefit to retire earlier in the tax year so the commuted value would be taxed at a lower rate.
The CV is added to your income for the year and taxed accordingly. So it doesn't matter when you receive it.
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Re: Annuities

Post by Shakespeare »

The CV is added to your income for the year and taxed accordingly. So it doesn't matter when you receive it.
If you retire Jan 1 rather than Dec 31 your MTR is lower.
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