Annuities

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

Post by cnicole »

I haven't seen this topic covered much. The reason I'm interested is my pension is underfunded and one option i have is to convert it to an annuity. What are the pros and cons of annuities? What are my options? What companies sell annuities? Is there anyone here who has bought an annuity? Any advice you have is appreciated.

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Re: Annuities

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We learn from history that we do not learn from history
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Re: Annuities

Post by cnicole »

Thanks. I must have missed it. :mrgreen:

I particularly find this link interesting

http://www.globeinvestor.com/servlet/Pa ... sidence=ON

My understanding is one way to determine how much money you need is to multiply it by 25. By that estimate 100,000 is worth 333 per month. On the other hand an annuity at 100,000 at 65 is 542 per month. Doesn't it seem like the annuity is worth more or is this a bad comparison?

I'll have to compare these amounts to my commuted value.
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Re: Annuities

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Re: Annuities

Post by brucecohen »

cnicole wrote: 15 Feb 2018 22:55 I haven't seen this topic covered much. The reason I'm interested is my pension is underfunded
The funded status of your pension plan matters less than the financial health of your employer. If the company is in reasonably good health it should be able to make the contributions required to properly fund the plan over 5-15 years. Note that interest rates have begun rising and higher interest rates reduce the projected cost of pensions, thus improving funded status with no new contributions. This thread would likely interest you.
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Re: Annuities

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Thanks for that link. You are right there are a lot of unanswered questions about the annuity option and I'll have to do more research. I guess my thinking on the annuity option is there would be less uncertainty. I have a provincial public sector plan that in theory should be safe. But what if the government wants to introduce changes like the federal government has with tpp? That's uncertainty even if nothing comes to fruition. Something like bmo is too big to fail. And annuities also benefit from higher interest rates.
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Re: Annuities

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Public sector pensions are like gold (well in most places other than the likes of Detroit). They will never 'short' the annuitant since they have a bottomless source of funds, i.e. the taxpayer.

Lastly, pension fund sponsors can only change pension plan rules on a forward basis. What has been earned to date is always grandfathered. My own corporate DB pension has 3 separate calculations based on changes over the years, including a change in corporate parent.
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Re: Annuities

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How do you explain this tpp proposal then? I thought the changes would effect current pensioners if passed and agreed to by the unions. Their pensions are certainly clouded with uncertainty.
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Re: Annuities

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I have no idea what you are referring too... Please explain.
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Re: Annuities

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Sorry wrong acronym, I am referring to the proposed introduction of target benefit plans that would affect current retirees (bill c27)

https://cupe.ca/bill-c-27-news-what-does-it-actually-do

Imagine you are relying on a certain income and then find its been reduced.
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Re: Annuities

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I suspect you are referring to this part
Most importantly, however, C-27 would permit a federally-regulated employer to convert their “Defined Benefit” promises into non-binding “Target Benefit” aspirations even on a retroactive basis.

If this bill passes, workers would suddenly have to defend the pension promises their employers have already made to them, for work they have already done. Workers and retirees held up their end of the bargain, but C-27 would allow employers to retroactively walk away from theirs.
I doubt very much this is factual in a literal sense. I think what CUPE is really saying is that from a union executive perspective, it means if I am 23 yrs old and the current DB plan is X, then I should expect that plan's existing provisions to last forever until I retire at 65. That is not a valid definition. The employer is still stuck with the obligations of the provisions that exist to the date of a change, i.e. the original DB provisions, but going forward, new provisions can apply under new rules for all pension credits earned after that date. That is not retro-activity in the true sense. Be careful of misrepresentations if indeed that is the case. I've not looked at the Bill so cannot really comment.

To use an example...

1. Let's say I started working at age 22 and was earning DB pension credits on the basis of 1.6% times years of service times final salary and I can take full pension at age 60. That goes on until I am 40.
2. At age 40, the company changes DB pension plan to be 1.2% times years of service times final salary and I take only take full pension at age 62 with a 5% discount per year earlier than age 62.

Now, I retire at age 60 at a final salary of $100k. My pension will actually be....

A. 1.6% (40-22)x$100k = 2.88k for the first 18 years of service, plus
B. 1.2% (60-40)x$100k...less 10% due to discount to age 60 = 2.16K for the final 20 years of service. Total pension is 5.04k

My guess is the same would happen with a change of DB to TB. There is no retro-activity involved UNLESS one believes the original deal when I was 22 or 25 or 36 years of age was broken. That is a simply absurd interpretation. No one guarantees anything of the sort on anything prospectively.
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Re: Annuities

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I've done as much reading as I can on this and it sounds like it does affect current retirees. The bill actually amends the pension act. Still I'll be watching this bill closely. There isn't currently a lot of information. While difficult and slow, laws can be changed.
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Re: Annuities

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Currently, defined-benefit (DB) pensions provide stability and security to employees because employers are legally obliged to fund employees’ earned benefits. Already earned benefits are legally protected. Bill C-27 removes employers’ legal requirements to fund plan benefits, which means that benefits could be reduced going forward or even retroactively. Even people already retired could find their existing benefits affected, after paying in their entire working lives.


http://canadianlabour.ca/news/news-arch ... 7-betrayal
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Re: Annuities

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cnicole wrote: 16 Feb 2018 14:04 I've done as much reading as I can on this and it sounds like it does affect current retirees. The bill actually amends the pension act. Still I'll be watching this bill closely. There isn't currently a lot of information. While difficult and slow, laws can be changed.
Please quote from the actual proposed legislation, not from union propaganda opinion pieces.

I'm with Altared on this, and the likelihood of affecting current retirees (or already earned credits for current workers) is between null and non-existent.
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Re: Annuities

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Good point re: union propoganda. The problem is there isn't a lot of information. Still the introduction of the bill shows the government is willing to change the pension law. Pensions aren't sacred. Let's face it people in the private sector are not keen on the gold plated pension plans so maybe the government weighs its options and decided it's ok alienating those in public sector as they have the support of those in the private sector. Luckily there is an ndp govt in BC right now. My understanding of this law is the union would have to vote in favour of the target benefit plan to have it introduced. I found it interesting there was a backlash against the enhanced cpp by millennials on redflag deals and I wonder if millennials see the value of pensions. I think some think they can make more investing.
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Re: Annuities

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cnicole wrote: 16 Feb 2018 15:36 Still the introduction of the bill shows the government is willing to change the pension law. Pensions aren't sacred.
Of course they are not sacred and shouldn't be on a 'go forward' basis. My pension plan changed 3 times in my career. If I didn't like it, I could resign and go work for someone else.
Let's face it people in the private sector are not keen on the gold plated pension plans so maybe the government weighs its options and decided it's ok alienating those in public sector as they have the support of those in the private sector.
I think it is more a case of the public sector being way out of touch with changes in the marketplace. It makes no sense to continue to support a dinosaur. Virtually no one starts and finishes a career with the same entities any more, and probably shouldn't to remain productive and relevant.
Luckily there is an ndp govt in BC right now. My understanding of this law is the union would have to vote in favour of the target benefit plan to have it introduced.
AFAIK, BC has no way to override federally regulated companies, so that would be wrong. I believe BC can only fuddle duddle with pension legislation for the BC public sector and provincially registered businesses.

Nothing is sacred on a forward 'prospective' basis, nor should it be. There is nothing to whine about... as long as what has been promised up to today is grandfathered.

Added: Here is a more balanced perspective on Bill C-27 http://www.moneysense.ca/save/retiremen ... ue-change/ It seems to be a change in the right direction.

I suspect some major CA firms must have some Summary articles on this Bill somewhere on Google.
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Re: Annuities

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All you're saying just reinforces my belief that I'm better off taking an annuity or the commuted value. Change is happening and I'm going to do what I can to protect my pension money as it is quite a bit of money.
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Re: Annuities

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cnicole wrote: 16 Feb 2018 17:50 All you're saying just reinforces my belief that I'm better off taking an annuity or the commuted value. Change is happening and I'm going to do what I can to protect my pension money as it is quite a bit of money.
I am not a pension guru by any stretch, but if the pension credits you have earned to date are grandfathered, I doubt you can buy an annuity of the same value as with leaving your DB pension credits where they are.

You are entitled to what you have earned and with a public sector pension, I cannot imagine any gov't entity ever reneging on DB obligations. You don't say what your age is or how many years of service you have.
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Re: Annuities

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I tend to be a bit on the pessimistic side. :roll: Another option would be to take the commuted value and annuitize part of it. I thought I read somewhere it's useful for tax purposes to annuitize unregistered money but I'm not sure. My pension is inflation indexed so that is an advantage. I know they may be making some changes to the pension to make it more sustainable so we'll see what happens

If I last to 65 my pension will be 1600/month or 466,000 commuted value. I do have other savings.
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Re: Annuities

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cnicole wrote: 16 Feb 2018 18:35 Another option would be to take the commuted value and annuitize part of it.
Those would be options if you leave your job, and you're younger than 55.
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Re: Annuities

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In my plan the commuted value or annuity option is available when you retire. I've confirmed this with hr. I found this article on annuities in unregistered accounts.

https://www.theglobeandmail.com/globe-i ... e23342537/
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Re: Annuities

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cnicole wrote: 16 Feb 2018 18:52 I found this article on annuities in unregistered accounts.

https://www.theglobeandmail.com/globe-i ... e23342537/
Rob Carrick is one of the better financial journalists out there. But that article is incomplete. For example, he reports a tax calculation based on prescribed annuities, but does not give any details on the assumptions. In particular, what is the level of taxable income with, and without the annuity? By how much do taxes payable go up when the presecribed annuity is added to the rest of the income? (The answer will depend on income level.)

I found the treatment of expenses rather cavvalier. Carricks gives one example of a sales commission, but we have no idea how representative that is. I suspect that it is on the low side, and that we are looking at 3 per cent and higher on average. That's equivalent to a front load on a mutual fund. How many of us would buy a mutual fund with a front end load?

More importantly, the 2.5 per cent is just the sales commission. There are also administrative fees, equivalent to a mutual fund's MER. I don't know how high those are these days, but when I did an estimate some seven or eight years ago, they were on the order of 3 per cent per year. Yikes.

What Carrick does not mention is that issuers of annuityies have their own life tables. Typically, these assume significantly greater longevity than Statistics Canada or the OCA. This is because purchasers of annuities self-select. Those who buy tend to be in better health, better educated, higher income -- all indicators of higher life expectancy. As well, premiums are higher for money coming from non-registered accounts than from registered accounts. That's because people who annuitize frok non-registered accounts have a slightly higher life expectancy than those who annuitize from registered accounts.

I'm not trying to dump on annuities -- although I guess that I just have. They are great in concept. But you have to be very careful as to tyhe price, expenses, etc. A great deal ceases to be one if it costs too much.

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Re: Annuities

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I considered annuities but rejected them for the reasons George noted: the costs are not transparent and are probably very high, particularly in a world of $9.95 commissions and 0.05-0.25% ETFs. The choice is likely between an LRIF and leaving as is. If the supplier is a provincial or federal guvmint, as is is probably best.
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Re: Annuities

Post by AltaRed »

I think the real comparison should be between a commercial annuity and taking the DB pension. I think the OP's fear being generated by union hysteria and most likely self-interest misrepresentation is misplaced. There isn't a soul around who wouldn't give a kidney, testicle or whatever, for the granite based soundness of a public sector DB pension.

There are many annuitants here of federally regulated corporations and/or the public sector and I don't see anyone else shaking in their boots.
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Re: Annuities

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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.

BTW, if you're in a typical public employee DB plan roughly one-third of your commuted value might have to be taken as a lump sum fully taxable in the year received. That's unless you buy a copycat annuity mentioned in the link I provided above. I've seen no actual examples of such contracts and doubt one can be purchased without taking a hefty haircut. You could talk to a financial advisor who's licensed to sell annuities and get a quote.

Up to now I've ignored all coverage of C-27 but a quick search turned up some info that might help you. First, though, understand that C-27 only affects federally regulated pension plans. My understanding is that you are in a provincially regulated one.

Here is a write-up from Morneau Sheppell, a prominent pension consulting firm. Pension consulting firms usually work for employers.

Here is a similar writeup from Eckler, another prominent pension consulting firm.

Here is a writeup from Koskie Minsky, a law firm that tends to represent unions and pensioner groups. They predict little takeup for TBP except among employees of distressed companies.

Here is the legislation. The part that concerns you is section 9.7 (1). To get there easily search on "Exchange of pension benefits"

In a nutshell:
1. The legislation would permit employers to offer TBP as an alternative to the conventional DB plan
2. The offer has to be an individual choice except that in a unionized company the union can speak for all. As you've seen from the union publications, unions hate any departure from the conventional DB structure so it's doubtful that many, or any, would force everyone into TBP
3. The individual can choose to transfer all or part of the DB entitlement
4. Significantly, the employer has to immediately transfer the full commuted value for every member who accepts TBP. That would create a hefty upfront cost for companies with underfunded DB plans.
5. The legislation and consulting firm writeups are silent as to what happens to those individuals who reject the offer. I assume they remain in the DB plan or the legislation gives the employer the option of purchasing a life annuity that delivers the promised benefit but with a life insurance company assuming all the funding risk. Annuity purchase would likely be practical only for those at or in retirement, or if there are very few people left in the DB plan.
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