Purchasing a life annuity with non-registered money has (and will continue to have) 3 major benefits to clients:
- Longevity protection: Lifetime guaranteed income unaffected by market volatility.
- Guaranteed income: The highest level of non-registered guaranteed lifetime income available.
- Tax advantages: Income from a life annuity purchased with non-registered money may qualify for preferential tax treatment, called prescribed taxation.
But, with tax changes coming January 1, 2017, there’s more incentive for clients to buy prescribed annuities in 2016. “The upcoming changes to prescribed annuity taxation provide significant incentives for clients in or near retirement to purchase their annuity in 2016,” says Kari Holdsworth, Vice President of Individual Wealth at Sun Life Financial. “These changes will increase the taxable portion of each payment and reduce the after-tax income clients receive, so it’s important to review clients’ plans before the New Year.”
The formula, specified by the Income Tax Act, used to calculate the taxable portion of a prescribed annuity* payment is changing:
|Between now and December 31, 2016||The formula uses mortality tables published in 1971.|
|January 1, 2017 and beyond||The mortality tables will be replaced with an updated version.|
This change won’t affect the amount of annuity income, but it will mean higher taxable portions for single and joint life annuities purchased on or after January 1, 2017.
Annuities sold any time before January 1, 2017 will still use the old mortality tables, even if annuity payments won’t begin until after January 1. The key requirement is that the annuity rates for a client’s annuity be “fixed and determined” before January 1. In general, a client’s annuity income has to be set by that date, even if it won’t start until after. “This rule provides a compelling reason for clients in or near retirement to buy a non-registered payout annuity before January 1, in order to pay less tax,” added Holdsworth.
See the difference
This table shows the potential impact of the tax changes, comparing identical annuities where the taxable portion is calculated using the existing vs. new mortality tables:
|Age at purchase||Annual income||Annual taxable portion – existing||Annual taxable portion – new|
|Single life: male|
|Single life: female|
$100,000 premium; 10-year guaranteed period; purchase date July 1, 2015; income starts August 1, 2015. For illustration purposes only. Different annuities will result in taxable portions that may not vary from old to new in the same proportion.
Which clients would benefit the most?
You may have clients who would benefit from prescribed annuities. Now is the time to start conversations if they:
- are age 60+ looking for a high level of guaranteed lifetime income,
- have non-registered assets,
- are near or in retirement,
- are interested in minimizing their taxable income in retirement, and
- want to take advantage of an attractive tax reduction strategy before its benefit is lessened by the new legislation.
Start the conversation
Download a short information sheet for clients, highlighting the tax advantages of purchasing a life annuity prior to January 1, 2017.
And when you’re ready to meet, get your clients involved. Use the Money for Life web app tools and calculators so clients can see the benefits of annuities first-hand:
- Annuity & GIC income comparison – Compare the income generated from a life annuity to the income that can be generated from a GIC using the same initial deposit (an annuity illustration is required before running this tool).
- Longevity risk illustrator – Show clients how long they could live and the health risks they may face as they age.
- Buy now, buy later – Help clients understand the trade-offs associated with delaying a life annuity purchase.
- Sustainable income demo – Discover what adding a life annuity to a retirement income plan can do.
If you have questions or want to learn more, contact a member of Sun Life Financial’s Wealth Sales Team.
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*An annuity purchased with non-registered assets that qualifies for prescribed tax treatment.