Report outlines potential of ALDAs, as well as risks

A proposed new annuity model could fill a gap in the retirement product market, but it also poses risks, says DBRS Ltd. in a new report.

The Toronto-based rating agency said that a new annuity product that was proposed in the latest federal budget, known as the advanced life deferred annuity (ALDA), could help guard against the risk of retirees outliving their savings.

The proposed ALDA would enable investors to buy an annuity for a lump sum at age 65, with payments beginning at age 85, and continuing for the rest of their life.

“The lengthier deferral period in an ALDA is important, as it enables the guaranteed income payments to be much larger than if the payments started right away,” DBRS said, adding, “Purchasing an ALDA reduces the likelihood of an individual outliving their retirement savings or not having adequate income in their later years when expenses generally rise as a result of increasing assisted living needs, health care needs and inflation.”

Yet, DBRS also warned that there are potential downsides to the product that must be factored in when evaluating it.

These risks include inflation, a lack of liquidity in the product, giving up control over investments, diminishing assets to pass along and the risk of dying before the payments kick in.

Ultimately, DBRS says that ALDAs will likely appeal to a relatively small portion of the overall population — such as retirees who can expect to live well into their 90s, and have enough savings to enable them to wait for years until the annuity payments kick in.

“Nonetheless, the concept of the ALDA is an encouraging step towards ensuring enough retirement income for Canada’s growing population of retirees age 85+,” DBRS concluded.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.