Which Option is Right for You?

It's important to remember that many factors enter into your retirement planning decisions. The following are some general comments regarding the characteristics of life annuities, registered retirement income funds and variable benefits. Although in most cases these general characteristics will apply, they may not hold true in every case.

You do not have to place all of your pension money into a single retirement product. You may use a portion of your money to purchase a life annuity, with the remainder being transferred to a prescribed RRIF, or where applicable, a Variable Benefit Account. As well, you could leave part of your pension money in a LIRA, provided you are young enough to still have an RRSP.

• What are your goals? In general, if providing income for yourself and your spouse during retirement is your goal, a life annuity provides a stable, predictable stream of income. If leaving an estate for your heirs is your primary objective, then a prescribed RRIF or a Variable Benefit is the option to choose. If you are thinking about your estate, bear in mind that lump sum payments from a prescribed RRIF or a Variable Benefit on your death are taxable, unlike the payment of a death benefit from an insurance policy.

• Are you permanently retired? If you believe that retirement is temporary, remember that a prescribed RRIF or a Variable Benefit allows you to un-retire by transferring money back into a LIRA. To do so, you must be young enough to be able to hold money in an RRSP. Under the Income Tax Act you cannot have an RRSP beyond the calendar year you reach age 71.

• How much risk are you willing to bear? If you purchase a life annuity, the investment risk is transferred to the issuer of that annuity. You get the same amount of income each month regardless of the investment return on your money. If you invest in a prescribed RRIF or establish a Variable Benefit Account, you bear the risk of poor investment returns and have the opportunity to benefit from good investment returns.

On the other hand, taking on investment risk may allow you to protect the purchasing power of your retirement income. The value of a fixed life annuity payment will erode with inflation. History has shown us that over the long-run, equities provide the best hedge against inflation. A prescribed RRIF allows you to invest in equities.  A Variable Benefit allows you to invest in the investment options available under your pension plan.

It cannot be said that there is no investment risk associated with a life annuity. You bear the risk that the market value of your pension assets or the interest rate on which the annuity depends is abnormally low on the date you purchase the annuity. You have no opportunity to take advantage of subsequent improvements in either.

• How long will you live? With a prescribed RRIF or a Variable Benefit your income is likely to decline with age. With a life annuity, the same amount will be paid to you for as long as you live. People are living longer. In 1941, a 65 year old Canadian female could expect to live another 13.6 years. In 1986, life expectancy for a 65 year old female was 19.1 years. With a prescribed RRIF or a Variable Benefit you bear the risk of outliving your retirement money.

• What do you expect annuity rates to be? If you believe annuity rates are low at the time you retire, you may wish to put off purchasing an annuity until rates are more favourable. A prescribed RRIF or a Variable Benefit allows you to delay the purchase of an annuity while still receiving retirement income. Probably the most important factor in determining the direction you expect annuity rates to go is your expectation of inflation. If you believe the rate of inflation will increase significantly then you should expect annuity rates to follow suit.

• What's your complication threshold? Purchasing a life annuity has the least complication after the initial decisions are made. Your lifetime income is set. With a prescribed RRIF or a Variable Benefit, you will be making investment decisions and you also must decide before the beginning of each year just how much you wish to withdraw from your prescribed RRIF or Variable Benefit Account.

A prescribed RRIF and a Variable Benefit are more difficult to invest than a LIRA or RRSP. The minimum annual withdrawal requirement means that you will have to maintain a portion of your fund in liquid assets. The withdrawal also means that you will have to regularly review and perhaps buy and sell securities to maintain your asset mix objectives.

We strongly urge you to contact someone qualified to give financial advice who can help you evaluate your own personal situation.

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