Over the past decade or so, Canadians have become increasingly worried about outliving their money. The perfect storm of rising life expectancies, low interest rates and the first wave of baby boomers converting their RRSPs to RRIFs has inspired the federal government to come up with a creative solution. That proposed solution is called the Advanced Life Deferred Annuity (ALDA).
How does it work?
Currently, the most common registered plan decumulation solution is a RRIF, which requires minimum percentage withdrawals annually. Canadians can defer realizing any taxable income from their RRIFs until the year they turn 72.
If approved, an ALDA would permit up to 25 per cent of a person’s registered investment accounts to be used to purchase an annuity which would not have to start paying until the year the plan holder turns 85. The ALDA would become available in 2020 and lifetime maximum would start at $150,000 and would be indexed to inflation.
Outliving one’s money
The ALDA offers many interesting angles for those who don’t want to be forced to de-register their RRIFs too soon. Perhaps the most common could be the worry that one might outlive their money.
Those with defined benefit pension plans receive a guaranteed monthly income, which lasts the entirety of their lives. Those without a defined benefit pension plan, however, might worry that they will outlive their savings. The ALDA would act as an insurance policy against living too long, thus helping to mitigate longevity risk.
Paying Less Tax
The other main advantage of an ALDA would be potential tax-savings.
For example, those who are still working might not want to take too much money out of their RRIFs just yet, especially if those withdrawals will push them into a higher tax bracket or result in an Old Age Security (OAS) recovery tax. The option to defer some of their RRIF income to a later date might allow them to continue working longer.
Others who may benefit from ALDA are those who have other taxable assets they would like to deal with before their RRIFs, such as a corporation or real estate holdings. Deferring some of one’s taxable income until a later date could allow a self-employed person to wind down these assets sooner than they could have if they were forced to take full income from their RRIFs.
The ALDA could also be a good solution for low-risk investors who like income certainty. Currently, their options include GICs, low-risk bonds, fixed income mutual funds and regular annuities. The addition of the ALDA would allow these investors another diversification strategy that suits their risk tolerance.
Extra-long life expectancy
The ALDA might also be an interesting strategy for those who worry about living too long but don’t want to lock up all of their money in an annuity. For example, Joe wants to spend his money during his lifetime, but wants an insurance policy in case he lives longer than expected. He sets up an ALDA to start paying at age 85 and reasons that if he lives that long, he will have enough income to support himself between CPP, OAS and the guaranteed income from his ALDA.
If passed, the ALDA would be another option to help people in certain retirement income scenarios. In particular, those who will have higher income during their first several years of retirement.
Nobody likes to pay more than their fair share of tax, but tax deferral at all costs is not always beneficial. Sometimes, less lifetime tax is paid and a larger estate created by taking early RRSP/RRIF withdrawals, rather than deferring taxation too far into the future.If you would like more information about tax-deferral strategies, speak with your financial advisor or accountant.