What is a Copycat Annuity? Updated 2023

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Is Your Pension Safe? Why a 'Copycat Annuity' Might Be Right For You

When it comes to retirement planning, Canadians are constantly seeking innovative and effective strategies to secure their income in retirement. One such strategy gaining traction is the copycat annuity. In this blog post, we will explore what copycat annuities are, their unique features and most importantly, why they should be considered as a retirement planning tool.

What is a Copycat Annuity?

A copycat annuity is an annuity offered by insurance companies in Canada which essentially mirrors the retirement income that you are being offered by your employer’s pension plan. It provides the same monthly payout and is identical to what your employer’s pension plan is offering you. Canada Revenue Agency only allows you to purchase a copycat annuity if it has the exact same offerings as the pension plan being offered to you from your employer.

If you decide to use the funds from your employer’s pension plan to purchase a copycat annuity instead of taking your pension from your employer, you will receive the exact same monthly income that you would have received from your employer’s pension plan. The difference is that a copycat annuity is paid to you from an insurance company instead of your employer. You would not have to worry about your employer going bankrupt because your pension benefits would have been transferred to a life insurance company (e.g. Sun Life, Canada Life, Desjardins, etc.) and the insurance company would be responsible for paying you your monthly income benefit.

The reason why a copycat annuity is often considered is because the Canadian insurance company could possibly offer you the copycat annuity at a lower cost than your employer which leaves you with a surplus of cash from your employer pension after it has been purchased. As a result, you would end up with the same monthly income from the insurance company as your employer pension plan, but you would also receive a cheque for the difference in the cost.

In simple terms, if your employer pension plan offers you a monthly payout of $5,000 per month for life or a commuted value buyout of $500,000, you have a few different options...

Option #1
You can take the $5,000 per month pension and have it paid to you for your entire life from your employer.

Option #2
You can take the commuted value of $500,000 and manage the investment funds and income stream by yourself. Your income would not be guaranteed and would depend on the performance of the investments that you have selected.

Option #2
You can get a quote for a copycat annuity from an insurance company in Canada which would provide you with the exact same income as Option #1. If the copycat annuity from the insurance company costs less than $500,000, you would want to purchase the copycat annuity and then receive a cheque for the difference in the cost. For example, if a copycat annuity which will pay you $5,000 per month for life costs $450,000 from the insurance company, you would want to move forward with Option #3 and then you would receive the difference of $50,000 from the insurance company. This would give you the same income as Option #1 and $50,000 in your pocket (before income taxes).

How is a Copycat Annuity Taxed?

The income received from a copycat annuity is 100% taxable to you as income. The income received from your employer pension plan is also taxed 100% as income so there is no difference in taxation between the two.

Copycat vs. Commuted Value from Pension

A copycat annuity is not the same as taking the commuted value from your pension. A commuted value is an option given to you at retirement where you do not accept the company pension income and instead you take a lump sum from your employer. The lump sum is then invested, and the performance will depend on how the investments that you have selected perform. You will also not have a guaranteed income and will have to draw your income as it best suits your retirement income needs. You could potentially run out of money.

On the other hand, a copycat annuity will pay you a guaranteed income stream for your entire life. If it is a single life copycat annuity, it will pay you a guaranteed income stream for your entire life. It is a joint life copycat annuity, it will pay you a guaranteed income stream until the 2nd death of yourself and your spouse. With a joint life copycat annuity, the monthly income payments are usually reduced to 66-70% of the original payment upon the death of the annuitant.

A copycat annuity will give you the peace of mind knowing that you have a guaranteed income stream for your entire life. The money is professionally managed by the insurance company that you purchase the annuity from (e.g. Canada Life, Desjardins, Sun Life) and is protected by Assuris in the event of insolvency by the insurance company.

Key Points on Copycat Annuities

Lifetime Income
Similar to an employer's pension, a copycat annuity provides guaranteed life time income, even after you pass away. With a joint life copycat annuity, the annuity will continue to pay income to the surviving spouse.

Freedom to Choose Annuity Providers
Copycat annuities empower individuals to select their annuity providers without restrictions. This flexibility allows for independent decision-making and the ability to choose a provider that best aligns with one's preferences and financial goals. Life Annuities.com, for instance, offers unbiased recommendations in collaboration with major life insurance providers like Canada Life, Sun Life and Desjardins.

Accessibility to Defined Benefit Pension Scheme Members
Copycat annuities are available to all members of defined-benefit pension schemes, including teachers, auto works, public sector workers and essentially anyone else who has a defined benefit pension plan through their employment.

Potential for Surplus Cash Lump Sum
With copycat annuities, there is a possibility of receiving a substantial lump sum of surplus cash in addition to the regular annuity payments. In many cases, the cost of a copycat annuity costs less to purchase and results in a lump sum amount being paid to you at the time of purchase.

Indexed for Inflation
The interest rate on copycat annuities is typically tied to the consumer price index (CPI), which measures inflation. This ensures that the annuity payments increase automatically each year, protecting against the erosion of purchasing power due to inflation.

Financial Stability and Canadian Insurance Companies
Insurance companies in Canada, such as Canada Life and Sun Life Financial, have a long-standing history, with Canada Life approaching 130 years in business and Sun Life tracing its roots back to 1865. These Canadian institutions have a strong financial foundation, managing significant assets and providing reliable pension and life insurance services. Life Annuities.com only works with the most financial sound life insurance companies in Canada who are also covered by Assuris.

Bankruptcy & Insurance Protection
In the unlikely event of a Canadian insurance company facing bankruptcy, protective measures such as Assuris are in place to assist annuitants. These safeguards offer more robust protection compared to relying solely on employer-sponsored pensions, reducing the risk of pension cuts resulting from employer insolvency. Assuris recently increased the protection that they offer in early 2023. Copycat annuity payments are now 100% protected up to $5,000 per month and 90% protected if the payment is over $5,000 per month.

Expertise & Diversification
Canadian insurance companies specialize in managing finances, pensions, and life insurance, without diversifying their operations into other industries. Their track record of success in Canada, coupled with widely diversified investment portfolios and global operations, instills confidence in their ability to safeguard clients' funds.

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