Many cheered when the federal government lowered the minimum RRIF withdrawals in the 2015 budget. With Canadians living longer and earning lower fixed-income returns, proponents said the move meant clients could stretch RRIFs further.
But for clients who converted RRSPs into annuities — specifically, Guaranteed Minimum Withdrawal Benefit (GMWB) products — the lower RRIF minimums may mean lower benefit distributions.
Here’s why. The GMWB’s contract states the insurer will pay out the greater of the RRIF minimum payment or the guaranteed income. Assuming a typical guarantee of 5% per year, when a client turned 71 under the previous regime, the GMWB would pay 7.38% — 2.38% more than the guarantee.
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Now, the age 71 minimum is 5.28%, meaning the client will receive a lower payout (only 0.28% more than a 5% guarantee). And, policyholders already drawing from their GMWBs may see future payments decrease to the current RRIF minimums. (For years when the guaranteed amount is higher than the RRIF minimums, there would be no difference.)
Two insurers, Empire Life and Manulife, have confirmed to Advisor.ca that their GMWB offerings will make payments based on the pre-2015 RRIF minimums this year; in 2016, they’ll use the current RRIF minimums. Both insurers allow clients to request that their 2015 payments reflect current minimums.
How to explain the change
While this change can be disheartening for clients, there’s political risk inherent in any financial decision, points out Jason Pereira, an advisor with Woodgate Financial Inc. and IPC Investment Corp. in Toronto. “The government can change the rules at any point,” he says. “If they suddenly changed capital gains to 100% taxable, maybe it wouldn’t make sense to hold as many stocks.”
Pereira points out that had rules been changed to increase RRIF minimums, the product manufacturers would be contractually obligated to honour that change as well. Both Manulife and Empire Life confirmed that would be the case for applicable contracts.
“You make the best decision at that moment,” he says. So far, as he’s been explaining the change to clients, “no one was upset with us, because we were proactive about it.”
It also helped that he reviewed GMWBs with clients regularly. “It’s not your run-of-the-mill product,” he says. “You have to explain the concept almost every time you meet to discuss their investments.”
Reassess GMWB suitability
With the new rules, GMWBs may no longer work for some clients. Pereira says he moved “a few million dollars out of GMWBs recently.” That’s because he groups GMWB clients into three categories:
- Clients who are highly risk-averse and are willing to pay a premium for safety
- Clients who risk running out of money unless they annuitize their savings
- Clients who got more money, net of fees, from putting a given amount into a GMWB than investing it otherwise (specifically due to the RRIF-matching part of the contract)
For clients in categories 1 and 2, GMWBs are still suitable, he says. Pereira told clients, “If you’re looking for security, you need to keep this,” despite lower payouts.
But category 3’s advantages are now gone. “It was always a conversation, previously, about [whether they] needed to pay this premium.” It was worth it before, but now, he tells clients, “You pay this premium, and [the government] just changed the rules. Now this strategy doesn’t make sense, so let’s turn this into a positive and let’s get you fee savings.”
The only penalty for getting out of a GMWB would be DSC fees, he notes, adding all his clients were either past the DSC period or weren’t sold the product with such fees in the first place.
Marie Gauthier, AVP of segregated funds at Manulife, says the RRIF change “doesn’t change the purpose of the product – it still provides a guaranteed minimum amount for life.” She says that lower payouts during a policyholder’s lifetime would mean a higher death payout.
She concedes that while current contracts are accurate, they could more clearly state that the legislative minimum can change over time and that contracts would adjust accordingly.
The change may not affect all clients, she adds. “The [RRIF] minimum is not always higher than the guaranteed amount,” she says. This happens sometimes in the first few years of the contract, but it depends.”
In a statement, Empire Life says, “The changes to the RRIF minimums do not currently impact the guaranteed income payments available from the current GWB policies; only the amount that must be withdrawn when the RRIF minimum is greater [than the] lifetime withdrawal amount. Advisors are encouraged to review the FAQ posted on the CRA website, familiarize themselves with the RRIF new minimum withdrawal factors and review the contract provisions of [their] policies.”
Further to go with RRIF minimums?
Pereira says the changed RRIF minimums made his financial plans more flexible, and helped some clients avoid the OAS clawback threshold.
“Our goal is to minimize the total lifetime tax while maximizing their estates,” he says. “In years where [a client] may have a taxable gain for selling some non-registered assets, you can withdraw the regular RRIF minimum, and in years where you don’t, you can withdraw more.”
He adds the changed minimums will help clients who tend to spend whatever comes into their accounts. “It’s a behavioural cap,” he says.