Segregated funds and annuities: Two products for life

The risk of outliving retirement savings, known as longevity risk, threatens the retirement portfolios of all Canadians and has increased in recent decades. People born in 2021 have a life expectancy over 2 years longer than those born in 2001, according to data released by Statistics Canada in 2023. 

Annuities and segregated funds with minimum withdrawal guarantees can protect your clients against the risk of outliving their retirement assets, a danger often referred to as longevity risk. These two types of products are key elements of your clients' retirement income, especially for those who do not have an employer's defined benefit pension plan. 

A defined benefit pension plan typically allows retirees to receive a fixed benefit for the rest of their lives. Without this plan, a future retiree can combine segregated funds with withdrawal guarantees and annuities to complement the lifelong safety net provided by public plans such as the Canada Pension Plan, Old Age Security Pension, and Quebec Pension Plan. 

Withdrawal guarantee 

According to product comparison tables prepared by AssuranceINTEL, only three insurers offer segregated funds with minimum withdrawal guarantees: Empire Life, iA Financial Group, and Sun Life. Sun Life offers two products: Sun GIF Solutions - Income Series and Sun Lifetime Advantage GIF. 

Empire Life's Class Plus 3.0 product stands out by offering, among other things, the option to subscribe to the fund with an initial deposit of $10,000. The iA product, FORLIFE Series, and the two Sun Life products, on the other hand, require an initial deposit of $25,000. However, Sun Life has informed AssuranceINTEL that it accepts smaller deposits. 

Income percentage 

A crucial element of the segregated fund with a minimum withdrawal guarantee is the rate that determines the amount of guaranteed lifetime income, which varies with age. The later the client starts withdrawals, the higher the income percentage will be. The rates and how they are calculated vary from one insurer to another. 

iA offers a higher rate than Empire Life, for example, 5% at 65 years compared to 4% at the same age with its competitor. The 5% rate offered by iA is the minimum guaranteed income rate at the Savings Stage, if the investment was made at least 10 years ago. At the Income Stage, the current income rate will be offered (5.26% in the example at 65 years).

In contrast, Empire Life plans that once withdrawals from Class Plus 3.0 begin, the percentage of the basic income payable automatically increases each year, from age 55 to 80. In its products, Sun Life does not specify a rate schedule like its competitors. However, it explains how it will calculate the income amount.

Target markets 

According to further research on the AssuranceINTEL website, insurers say they mainly target a clientele of people looking for a lifetime income for retirement (Empire Life), aged between 50 and 75 years (iA) or 55 to 75 years (Sun Life). 

iA lists the target clientele for its FORLIFE Series: clients who do not have a pension fund; clients of guaranteed investment certificates; mutual fund clients who fear market risks as retirement approaches; segregated fund clients who appreciate the advantages of guarantees. 

Empire Life and Sun Life guarantee 75% of the fund's value in case of death and at maturity. Only iA Financial Group offers a 100% death guarantee. The only exception: clients aged 80 or over at the time of investing in FORLIFE Series will only be entitled to a 75% guarantee. 

Accumulation phase 

Again, according to product comparison tables prepared by AssuranceINTEL, 13 insurers offer a total of 18 segregated fund products. These are accumulation products. Clients will eventually be able to transfer their assets to the income vehicle of their choice, for example, into a Registered Retirement Income Fund (RRIF) or use them to pay a single premium to subscribe to an immediate annuity with an insurer. 

Canada Life and Manulife are the only ones to offer 3 products each. Manulife and iA stand out with each offering a registered education savings plan product, namely Manulife's Segregated Fund RESP and iA's My Education+. 

Among all the segregated fund products offered are the minimum withdrawal guarantee products of Empire Life and iA, as well as Sun Life's Sun Lifetime Advantage GIF product. 

The competition is fierce on the capital guarantees at maturity and death of segregated funds. Assumption Life, Manulife, RBC Insurance, Sun Life, and Wawanesa Life have decided to limit their maturity guarantee to 75%. The others offer the choice of a 75% or 100% maturity guarantee. In one of its three products, Estate Protection segregated funds policy, Canada Life limits the maturity guarantee to 75%. 

All providers offer the choice between a 75% and 100% death guarantee, except two. Manulife has chosen to limit this guarantee to 75%. Wawanesa stands out from Manulife by offering an 85% death guarantee. 

Several annuity options 

According to tables prepared by AssuranceINTEL, 13 insurers offer annuity products. Annuity providers call them different names: immediate annuities, single premium annuities, or income annuities, among others. Insurers position this product as protection that allows the annuitant to cover their basic expenses, regardless of their longevity. 

To subscribe to an annuity, the client will pay a single premium to the insurer. The premium is used to constitute an immediate annuity that will pay a regular income to the annuitant, usually each month. It is distinguished into two main categories based on duration. The life annuity produces income for life. The certain annuity produces income for a fixed duration at the outset, for example, 10 years, 15 years, or 20 years. 

An annuity can be subscribed on a reversible basis. Another person, for example, the spouse, can benefit from the annuity if the first annuitant dies before them. All insurers listed in the comparative table prepared by AssuranceINTEL offer it. 

Disparities 

This is not the case regarding death capital (also called death benefit or premium refund upon the annuitant's death): Co-operators, UV Insurance, and Wawanesa Life do not offer it. 

Only Canada Life, Desjardins Financial Security (DFS), and iA Financial Group offer the reserved capital feature. Further research on the AssuranceINTEL website reveals that Canada Life offers this benefit upon the death of the last annuitant for life annuities only. "This is the single payment option," explains the insurer. 

For their part, DFS and iA indicate that this benefit is available with their life and reversible annuity products. Desjardins mentions that it must be an annuity without a guarantee period. Both specify that the company will refund the difference if the premium that constituted the annuity is higher than the sum of payments made to the beneficiary. 

The annuity can be subscribed with other options. For example, it can be indexed by a certain percentage to account for inflation. The annuitant can also add to the annuity a guarantee that payments will continue for a certain number of years after their death. The beneficiary designated at the time of subscribing to the annuity will receive these payments. In other cases, the annuity contract provides that a lump sum will be paid to the beneficiary, which some insurers call a death benefit. 

Complex taxation 

The funds that will constitute the annuity can come from different sources. If they come from assets of a registered vehicle such as an RRSP, the annuity will have the status of a registered annuity. This will determine how the client's annuity income will be taxed by the tax authorities. 

In a guide on immediate annuities, Sun Life explains that income from an annuity subscribed with registered funds will be fully taxed each year. When the annuity comes from non-registered funds, only part of the income will be taxed. Sun Life adds that three different regimes govern the taxation of annuities: prescribed taxation, accrual income taxation, or uniform taxation. 

The Canada Revenue Agency (CRA) will consider the income from a prescribed annuity as a combination of interest and capital. Under this CRA tax treatment, only a fixed part of each payment (the interest portion) will be taxable. Equitable Life explains on a section of its website that the prescribed life annuity has a uniform tax structure, meaning that the taxable amount is distributed equally over the life of the annuitant.