Moshe Milevsky, a finance professor at York University’s Schulich School of Business, values deferred annuities. He says he believes this strategy maximizes retirement income. He demonstrates this in a case study of a new retiree who has the choice of either beginning to withdraw his or her pension from a defined benefit plan now... or to wait a number of years. 

But, in order to have this choice, the retiree must be able to afford to wait. In a recent webinar, Milevsky examined the hypothetical case of someone who has that ability. She is eligible at age 60 for an annual pension of $60,000, and has a portfolio of $1 million in relatively safe investments (with a projected 4% annual return). 

She can choose to take the annuity payments now or defer them. Each year of deferral increases the pension by 7%. She also has a third choice: her plan offers a lump sum of $885,000 that she can cash in instead of receiving her annuity. 

“What would you recommend?” asks Milevsky, positing that this 60-year-old will want to have the highest possible standard of living for the next 35 years. The case study, which is primarily intended to demonstrate the effect of delay on the value of the annuity, considers only the standard of living sought and not the amount of money the person might want to leave as a legacy, for example. 

Optimal strategy 

In this case study, the individual could choose to receive her $60,000 per year pension beginning now, or, instead, she could decide to defer payment of her pension for five years and receive an $85,000 pension starting at age 65. 

If she chooses to take the $885,000 lump sum and invest it with her $1 million portfolio (total: $1.85 million) at a 4% annual return, she can expect an annual income of $100,000 for the next 35 years. 

But you can do better, Milevsky believes: defer the $60,000 annuity for 10 years. This will allow the individual to generate an annual income of $121,000 per year starting at age 70, according to his projections. This will be at the cost of completely drawing down her $1 million portfolio by the end of the 10-year wait, after withdrawing $121,000 each year to achieve the same standard of living the annuity will produce starting at age 70. “This is the optimal strategy,” he says. 

Longevity funds  

Income fund providers have also addressed the longevity risk of outliving savings. Among them, Guardian Capital offers income products in both mutual fund and exchange-traded fund (ETF) versions. Milevsky helped build GuardPath Longevity Solutions as Chief Retirement Architect in collaboration with Guardian Capital.

For example, the Managed Decumulation Fund at GuardPath targets cash flow of 8 per cent annually. Guardian Capital says that this fund seeks to generate stable cash flows for 20 years using sophisticated risk management techniques to extend the life of the portfolio. According to Guardian Capital's calculator, a $500,000 investment will produce an annual distribution of $40,000 for 20 years, for a cumulative distribution of $800,000. 

GuardPath Modern Tontine is designed to provide a significant lump-sum payout to surviving unitholders after 20 years, based on compound growth and the pooling of what the manufacturer calls survivorship credits. According to Guardian's calculator, a $200,000 investment assuming a 6% return would produce a lump sum payment of just over $913,000 to each surviving unitholder. 

A new player in the ETF market, Evermore Capital, has created a series of target-date funds to make these products, usually reserved for retirement plans, more accessible to individual investors, said Myron Genyk, co-founder and CEO of Evermore Capital in a statement. The assets in a target date fund are automatically rebalanced as the target date approaches. 

A 15-year Bay Street veteran, Genyk says he created Evermore Retirement ETFs to make retirement investing accessible to all Canadians at a low cost. The ETFs are offered at a fee of 0.35%. Genyk says Canadians are facing increasing challenges as they approach retirement in the face of a looming recession, and that Evermore is the first to provide a comprehensive solution in this area. A balanced fund, Evermore Retirement ETFs were established on Feb. 11, 2022, according to Sedar.com. 

Annuities for babies! 

Annuities are not just for older clients. The comparison charts of InsuranceINTEL, the insurance industry’s product and marketing intelligence centre and sister company of the Insurance Portal, show this eloquently. Many insurers offer annuities that can be purchased as early as age 16 or 18. Others go so far as to offer them from birth (age 0), including Canada Life, iA Financial Group, Sun Life and Wawanesa Life. 

They can be life annuities: the annuity payments only end when the annuitant dies. They can be term: payments last for a specified period. They can also be reversionary: payments continue in favour of the spouse, according to a proportion of the initial amount chosen at the beginning. Some insurers offer all of these options, including Equitable Life. 

Prior to payout 

Often seen as a payout product, an annuity can also take on the appearance of an accumulation product, such as a term deposit or segregated fund. This is known as a deferred annuity. Annuities, whether immediate or deferred, may or may not be registered, in the form of an RRSP or a Retirement Income Fund (RIF). 

Segregated funds are a popular products during RRSP season, offering a minimum guarantee of 75% of the accumulated funds at the maturity of the segregated fund contract or in the event of the owner's death. Most insurers offer 100% protection on death, and many offer 100% protection at maturity and death. Insurers are making this product available to younger investors by allowing them to start investing in a segregated fund with a pre-authorized deposit plan of $50 per month, or $25 with some insurers, including Canada Life. 

Registered annuities are not taxable during the deferral period. They are taxable when payments begin. The taxation of an annuity in the payout phase will differ depending on whether it is prescribed or not. During the payout period, payments from a prescribed annuity are considered to be a blend of interest and principal. The tax levied will therefore be fixed for each annuity payment.

The income from a non-prescribed annuity will be taxed annually on the interest earned. The taxable amounts are generally higher in the early years and decrease thereafter.