Reports in the news media about Registered Retirement Income Funds (RRIFs) are generating discussions about Canadians outliving their retirement savings.1
Concerns over the government’s required minimum annual withdrawal rate — how much RRIF owners must take out of these plans each year — arise as government agencies, business analysts, and lifestyle reporters show Canadians they’re living much longer now; for example, up to 25 years longer compared to the 1920s.2
Clients looking toward their retirement or already in retirement may have questions about RRIFs and how they can make sure they’ll receive income as long as they live. You can help them understand RRIFs and products like payout annuities that can provide guaranteed income for life.
Your clients may ask the following questions; be ready to answer them in clear, easy-to-understand language.
What’s the difference between registered and non-registered savings?
Registered savings are special savings accounts, such as a Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP), governed by income tax rules that offer tax relief. For example, contributions to an RRSP can be deducted from income to reduce tax. The investments held in the plan grow tax-free, but any withdrawals are fully taxed. Rules restrict the type of investments the plan can hold, how long the plan can be held, and the amount that can be contributed.
They’re called “registered” plans because they must be registered with the Canada Revenue Agency (CRA) to receive the special tax treatment. The financial services company you set up your RRSP with arranges this registration.
Non-registered savings accounts have no restrictions. You can save any amount, and hold any kind of investment. You pay tax on the income you earn from the investments each year.
What’s a Registered Retirement Income Fund?
A RRIF is a kind of registered plan that converts an RRSP into income. Having a RRIF within your investment portfolio can reduce the amount of tax you pay.
RRSPs must be converted to income by December 31 of the year you turn 71. Converting to a RRIF allows the RRSP’s value to be “rolled over,” without having to pay tax right away. Like an RRSP, the investments in the RRIF grow tax-free; the investments the plan can hold are restricted to certain types; and you’ll pay tax on any withdrawals. You must withdraw a certain percentage of the RRIF’s value each year, starting in the next year after you set up the RRIF.
How does the RRIF minimum withdrawal rate work?
The Income Tax Act sets the minimum amount that you must withdraw from your RRIF each year. The amount varies, depending on your age and the value of your RRIF. With Canadians living longer than ever before,3 your RRIF’s value could fall close to zero, and you could run out of money, potentially with many years left in your retirement.
Can I take more money out of my RRIF than the minimum amount?
Yes, you can take out as much money as often as you like, as long as it’s more than the minimum amount.
Do I have to convert my RRSP to a RRIF?
No, you have two other choices: you can take out the account value as a lump sum cash payment, but you’d pay tax on the whole payment. Or, you can buy a life annuity that would pay income at regular intervals for the rest of your life. A number of factors determine payment amounts, such as your age and rates at the time of purchase. Your income will be taxed each year as you receive it.
What is a life annuity?
Offered only by life insurance companies, the life annuity acts like a personal defined benefit pension plan. You give the life insurance company money — usually only a portion of your total retirement savings — and the insurance company gives you guaranteed income for the rest of your life.
What’s the difference between a payout annuity and a life annuity?
Payout annuity refers to a category of products that pays guaranteed income. A life annuity is a type of payout annuity that pays income for as long as you live. Another type of payout annuity is a term-certain annuity, which pays income for a specified period of time.
Could I have both a life annuity and a RRIF?
Yes. This choice can be wise, depending on your retirement planning goals. Splitting your RRSP money into a RRIF and life annuity can provide the best of both retirement income worlds: growth potential and guarantees. With the RRIF, you can invest in mutual funds, GICs, and other investments that could provide higher returns. These investments could also provide some protection against inflation at the same time you’re receiving income. The life annuity provides the security of guaranteed income for life, with no exposure to the ups and downs of the market.
What’s the biggest advantage of buying a life annuity?
The biggest advantage of buying a life annuity is the guaranteed income payable for life. With the rules that set the minimum amount you have to take out of your RRIF every year, you could live longer than your RRIF payments. It’s quite possible; Canadians are living longer, and many will live into their nineties.4 Buying a life annuity will help you to cover basic expenses, and with a life annuity, that money will last as long as you live.
Can you show me how this works?
Money for Life is Sun Life’s customized approach to retirement planning. I can use a tool on the Money for Life web app that will show you how much more income you could receive when you include a life annuity as part of your plan to create income during your retirement.
How can I be sure the insurance company will be around decades from now to pay income to me for the rest of my life?
Many life insurance companies in Canada have been operating for some time and hold significant amounts of payout annuity wealth. For example, Sun Life Financial has been operating for 150 years and manages almost $700 billion dollars in assets.5 Payout annuities make up over $3 billion of that figure. As well, for the fifth year in a row, Canadians voted Sun Life Financial the “Most Trusted Life Insurance Company” (Reader’s Digest 2014 Trusted Brands Survey).
1 “Time to lower RRIF minimums,” Advisor.ca, October 30, 2014; Adam Mayers, “The high cost of taking money out of your RRSP: The rules governing the conversion of RRSPs into RRIFs are out of date and may be hurting people in their old age,” Toronto Star, October 30, 2014; Rob Carrick, “Why Canada needs to update its RRIF withdrawal rules,” Globe and Mail, October 27, 2014.
2 The average Canadian’s life expectancy at birth is age 81.7, up from 57 in 1921. Statistics Canada report, July 17, 2014. Also reported in National Post, July 17, 2014.
3 In Canada, even at age 65, a woman’s average life expectancy is almost age 87; a 65-year-old man’s average life expectancy is almost age 84. Thirty-five years ago, those averages were age 84 for women and age 80 for men. Life Tables, Statistics Canada, 2012.
4 “Canadians face more years of saving, work as chief actuary increases life expectancy,” Financial Post, April 16, 2014. Jean-Claude Ménard, Canada’s Chief Actuary, reports many Canadians will live longer than age 90.
5 Sun Life Financial’s assets under management (AUM) were $698 billion as of September 30, 2014.