Save Taxes With A Life Annuity

The last week of October this year saw a large benefit for two or more million pensioners from the Conservative Government.

Keith MacIntyre, a tax partner with Grant Thorton in Halifax was quoted a saying that “it can save retirees a considerable amount of money” and  that “pension income splitting can be a gigantic benefit for people. ”

How to start your calculation

The higher income spouse or common law partner, should assume most or all of the  housing expenses, leaving the lower income partner with more money to invest.

And this action has run on effects. Reducing the income of the lower income partner could reduce or eliminate the clawback of the Old Age Security payments or the age credit for the higher income spouse.

Neither of these benefits should be overlooked. And there can be further tax savings if both partners can claim the pension income credit.

Life Annuity Retirement Benefits

Life annuities from a company pension plan can also be split, no matter the age.

And for those over 65, RRIF and life annuity payments from a RRSP can also be split by filing a joint election form.

So for pensioners it is the real income that is split as opposed to the family tax cut. So if, for example one receives $750 a month and the other $250, they can each receive $500 monthly if they are at least 60 years of age.

Calculation

If all this seems a bit much, we suggest you speak to an accountant; they are the experts.

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Two Phases of a Life Annuity

There are two phases for a life annuity purchased in Canada.

  1. The accumulation phase in which you make deposits and earn interest over the years.
  2. The distribution phase in which insurance company makes life annuity payments until the death of the annuitants named in the contract.

An alternative is a term certain annuity contract so that the distributions in income is over a fixed time period.

The 2 phases of the life annuity combine for an annuity which makes regular payments until death or the end of a guaranteed period if death occurs earlier.

The accumulation phase is well understood by all Canadians, you need to save and invest for your retirement.

But what most people have difficulty with is the distribution phase when they have to decide to switch from accumulating money to using it as income.

And the basis of those fears are that you will run out of money before you die. And that is backed by fears of low interest rates, stock market collapses, thievery and loss of mental control.

And that is why people buy life annuities; a life annuity gives you control even if at some later stage of your life, you are unaware of your capabilities.

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An Annuity’s Taxable Portion Explained

Often my clients, who buy non-registered life annuities, ask me to explain why the lowest premium on a quote table attracts a less taxable portion than the highest premium.

And now I have a definitive answer (I hope).

The greater the capital you invest into such a life annuity, the greater the return of capital you will receive in each life annuity payment. Thus the taxable portion of each payment is lower!

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Should you consider an annuity?

My comments to “Should you consider an annuity?” by Kevin Press at BrighterLife.ca

Mr Press has emphasized perhaps the most important element in the purchase of annuities today.

As the largest seller of life annuities in Canada, in which we specialize at www.lifeannuities.com, we find that that most people seem to believe that it is 1-5 year GIC rates which set the scenario for the payouts which is not true at all.

And even if long term bond rates do rise,there is still no guarantee that annuity rates will go up. And of course you are getting older and losing time to enjoy the income.You might want to read ” Retirement Income; income that lasts a lifetime ” which you can find here. Hopefully it will give you some ideas.

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Forcing seniors to outlive their savings

From the C.D. Howe Institute: Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update

Click here for the full pdf report: Outliving our Savings

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Change RRIF drawdown rules: C.D. Howe

In this article “Change RRIF drawdown rules: C.D. Howe” from Investment Executive not only makes some good points but raises a big issue I have been discussing with my clients over the last 2 or 3 years.

We are living longer but not necessarily better in the sense that sitting staring into space is not really a lifestyle.

Most people know diddly squat about finances. They’ve been paid a salary all their lifetimes,taxes have been deducted at source,pension monies have been allocated and generally they’ve been in a financial warm blanket.

Now it,s all over and they’ve got a lump sum,payments from which to replace their salaries.

Well it,s not that simple.Now they have to make decisions on their own and they are paralyzed as they have never had the experience of handling hundreds of thousands of dollars at one time.Their financial experience has been limited to not spending too much on food and buying GIC’s with their savings.

Now comes along this great whack of money and they need to make some decisions.Reading books only confuses them as it is their situation which concerns them,not examples.

But they find out they have 2 real choices; a RRIF or an annuity.And the RRIF has a built in fail system if you live too long.But with no real grasp on your finances during your lifetime,you are certainly not going to become a wizard in your retirement and make meaningful comparisons.

So you buy your RRIF, perhaps not realizing that you are being forced to withdraw capital as well as interest to meet the minimum payment.as your capital is not earning enough money to meet that payment each year.

But I disagree with making the minimum payments smaller or allowing withdrawals at will as most people will not have the skills to manage money as they age.If they didn’t have the skills growing up,they,re not going to become smarter when they age.Allowing withdrawals at will is really the 2 foxes and the hen deciding on what to have for dinner.

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Use Annuities To Protect Yourself From Yourself

In this very recent issue of Forbes magazine  there was an enlightening article on life annuities, “Use Annuities To Protect Yourself From Yourself.

The author, Jeffrey Brown, makes several good points but one that really struck me as relevant was the comment on the mental ability to make correct financial, or indeed, other decisions, later in life.

“Half of the 80-year-old population is not in a position to make important financial decisions. So how does a retiree protect their future older self against their own bad future decisions including, but not limited to, becoming the victim of fraud?”

While, as a life annuity broker, I have not written much if anything on this topic, it is certainly a subject I have brought up with my older clients and sometimes their children.

As is well known in Canada, at retirement, Canadians can choose RRIF’s or annuities as a vehicle to provide life income. But it is only a life annuity that guarantees that income for the lifetime of the annuitant. With a RRIF, the retiree can choose GIC’s of various length, mutual or segregated funds invested in different securities or other approved vehicles. But there is no guarantee of capital appreciation. Indeed the RRIF capital gets worn down by the increasing mandated withdrawals, just as the need for a more fixed income starts to be apparent

Yes, at 60 or 70 you can handle investment decisions but with age and possible illness, but will you be capable later on?

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Running Out of Money? How Life Annuities Provide Income for Life

Retiring today is not as simple as it was for previous generations. Most new retirees and those about to retire are not counting on pensions with potentially unlimited numbers of payouts. Instead, most people in this situation are counting on limited funds available in RRSPS, Group Pensions and their savings to last them as long as necessary.  Continue reading “Running Out of Money? How Life Annuities Provide Income for Life

Running out of money?

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Saving enough isn’t the only worry in retirement

My comments on “Saving enough isn’t the only worry in retirement” by Craig Sebastiano | May 15, 2014  from Benefits Canada.

This article highlights the needs for individuals to look after their own retirement needs.

If a majority of the population is depending on the government for retirement income, then we’re all in great danger. The old shibboleth of having a better pension if you wait till you,re older is trotted out but health is not mentioned at all.

And health should be the major decision=maker of how and when to start your retirement pension.

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How living longer can hurt your retirement planning

My comments on a recent article in the Toronto Star  “How living longer can hurt your retirement planning” by Moshe A. Milevsky & Alexandra Macqueen

This is another comprehensible article for all retirees to consider.

Now we are faced with the fact that we could live longer for varied reasons and the question is, how do we cope with that?

It might seem a simplistic answer but this is the reason life annuities were designed.They take out that risk of outliving your money and put the risk on the shoulders of the insurance company. As you don’t intend to shovel snow when you are older but rely on someone else, so you hire the insurance company to send you monthly cheques.

The talk of mortality tables and longevity risk means little to each person who is concerned with their own situation. And all these theoretical discussions never mention the physical and/or mental health of health of the annuitants. All the planning goes out the window when somebody becomes ill.

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