Desjardins Insurance is offering its clients the advanced life deferred annuity (ALDA) through financial security advisors. The insurer announced its launch on December 6, 2023.
Desjardins claims to be the first financial institution in Canada to offer the ALDA in individual savings. "The offer does not target clients of group retirement plans offered by employers," Philippe-Olivier Dumas, director of guaranteed investment fund (GIF) development and pricing and annuities at Desjardins, explained in an interview with the Insurance Portal.
Desjardins is also expanding its range of responsible annuities, of which the ALDA is now a part. Desjardins invests the premium for subscribing to an individual annuity in responsible investments, based on environmental, social, and governance (ESG) criteria.
Protection against longevity
Desjardins describes the ALDA as a tax-advantaged product that allows investors to defer the taxation of their registered investments beyond the age of 71. At this age, individuals must mandatorily withdraw funds from their Registered Retirement Savings Plan (RRSP), transfer them to a Registered Retirement Income Fund (RRIF), or use them to purchase an annuity.
The introduction of the ALDA was announced in the 2019 federal budget. The Government of Canada amended its tax rules on January 1, 2020, to allow an ALDA to be an eligible annuity purchase from savings accumulated in the following registered plans:
- Registered Retirement Savings Plan (RRSP).
- Registered Retirement Income Fund (RRIF).
- Deferred Profit Sharing Plan (DPSP).
- Pooled Registered Pension Plan (PRPP).
- Registered Pension Plan (RPP) with defined contributions.
The ALDA payments must start before the end of the year in which the person reaches the age of 85. The cumulative ALDA ceiling for 2023 is $160,000. This ceiling remains unchanged from 2022. The ALDA ceiling was set at $150,000 in 2020 and 2021.
Retirement tax planning
Philippe-Olivier Dumas believes the ALDA gives advisors an additional tool for tax planning and retirement planning for their clients. "Advisors will have an extra tool to offer their clients to manage the risk of outliving their savings and to defer their taxation," he explains. "The increasing life expectancy heightens this need. Beyond 90 years, home health care represents a significant portion of people's savings. It's a risk somewhat underestimated in society."
"The ALDA really allows reducing the cost of purchasing the annuity by targeting payments that can be deferred up to 85 years," adds Dumas.
Defer and receive 4 times more
According to data generated on December 11 by CANNEX Financial Exchanges Limited's annuity rate comparison site, an 80-year-old man can obtain a monthly income of $822.63 from an annuity purchased with a lump sum of $100,000. Under the same conditions, a 65-year-old man can obtain a maximum monthly income of $576.16.
When subscribing to the ALDA, Desjardins takes into account long-term interest rates and the client's life expectancy, explains Dumas. "We're talking about very long-term interest rates, which are currently beyond 5%," he adds.
The reference rate Desjardins will use at the subscription of the ALDA will vary according to the age of the deferral chosen by the client, explains Philippe-Olivier Dumas. The insurer offers its product to clients aged 55 to 80 years. The client must choose a deferral of at least 5 years. "In our product, the choice of deferral can vary between 5 years and 30 years," specifies Dumas.
He provided the Insurance Portal with a simulation of an annuity based on a rate of 5.25%, to demonstrate the benefits of deferring monthly annuity payments to 85 years rather than receiving them at 71 years. In this simulation, the payments are four times higher at 85 years than at 71 years (see your Executive Level files).
Potential supported by rates
Philippe-Olivier Dumas thinks the ALDA meets a specific need in individuals' retirement apparatus. "It's a niche product, as the investment is limited to $160,000 due to federal government rules," he says. Dumas adds that in individual savings, the funds to create the annuity will come from RRSPs or RRIFs.
He estimates that Desjardins' ALDA offer will be supported by a record year for individual life annuities, due to high interest rates making them more attractive.
