Transfer Value... buying an annuity?

[ballz]

Hello all,

Never seen this option before... I was always told that, as I am under 50 and not entitled to an immediate annuity, my pension options are:

1. Deferred annuity, starting at age 55.
2. Deferred annuity, starting at age 60.
3. Take the transfer value... inside/outside limits, all that jazz.

However, using the tools from the Pension centre's website, it appears that a sub-option of the transfer value is that you can purchase an annuity from a financial institution. Does anybody know anything about this option?

My primary question is... can I use the entire TV to buy an annuity, and then it only gets taxed as it is paid out to me? This option could change my tax planning substantially.

 

[dapaterson]

From what I understand (RBC option 2 below) purchasing an annuity similar to what you'd otherwise receive as a pension can be transferred without tax implications.

However, I am unclear on what the payout rules for the annuity would be - you'd have to check with the financial institution. If it would deliver similar benefits in a similar timeframe, the additional benefits of indexing plus the ability to be covered with medical / dental insurance once you start receipt on the annuity (paid 50/50, individual and government) may make a deferred annuity worthwhile.

Take the Commuted Value of Your Pension, or Leave It in Place?

You are leaving your job. Do you keep your pension plan in place, or commute your pension to cash? Here are some pros and cons to consider.

discover.rbcroyalbank.com

 

[brihard]

Talk with a financial planner, and make sure you look into what happens with the annuity when you kick the bucket- consider how important it is to your estate planning to have assets for your kids. An annuity might cease to exist when you do.

 

[hattrick72]

Are you releasing early? I thought all CAF pension options were immediate annuities?

IMO the lump sum buyout is far too low when you consider the current interest rates.

 

[dapaterson]

Transfer value calculations include interest rates as a factor.

 

[Messerschmitt]

From what I understand (RBC option 2 below) purchasing an annuity similar to what you'd otherwise receive as a pension can be transferred without tax implications.

However, I am unclear on what the payout rules for the annuity would be - you'd have to check with the financial institution. If it would deliver similar benefits in a similar timeframe, the additional benefits of indexing plus the ability to be covered with medical / dental insurance once you start receipt on the annuity (paid 50/50, individual and government) may make a deferred annuity worthwhile.

Take the Commuted Value of Your Pension, or Leave It in Place?

You are leaving your job. Do you keep your pension plan in place, or commute your pension to cash? Here are some pros and cons to consider.

discover.rbcroyalbank.com

I looked into this yearly annuity thing from sunlife as an example. It seems that the lowest age is 50. Which is basically the same minimum age that you can start drawing your pension.

Someone who is 35 and releasing can't get the annuity. Not that it would make much sense. I'd rather have 500k in the bank (250k locked, 250k income - RRSP), than get 1500/2000 a month.

 

[SupersonicMax]

I looked into this yearly annuity thing from sunlife as an example. It seems that the lowest age is 50. Which is basically the same minimum age that you can start drawing your pension.

Someone who is 35 and releasing can't get the annuity. Not that it would make much sense. I'd rather have 500k in the bank (250k locked, 250k income - RRSP), than get 1500/2000 a month.

Not sure where you got your age 50 but as soon as you hit 25 years of service, you are entitled to an immediate annuity. For some, that’s 41 years old.

25 year pension for me is 7,300/month before taxes. That’s an equivalent of $3.8M if I retire at 41 assuming death at 85 (today’s dollars). My current transfer value is $1.6M. I am sure the math is similar for other salary brackets. The hassle and uncertainty of investments is just not worth it. I’ll take the financial security.

 

[Messerschmitt]

Not sure where you got your age 50 but as soon as you hit 25 years of service, you are entitled to an immediate annuity. For some, that’s 41 years old.

25 year pension for me is 7,300/month before taxes. That’s an equivalent of $3.8M if I retire at 41 assuming death at 85 (today’s dollars). My current transfer value is $1.6M. I am sure the math is similar for other salary brackets. The hassle and uncertainty of investments is just not worth it. I’ll take the financial security.

Usually when people talk about transfer value is when they don't have the 25 years in. So my post was entirely based on people who release after their VIE of 9-13 years.

Someone at 35 as per my previous post would never have the 25 years of service. (heck, not even 20 if it was the old model). Even if I didn't specifically mentioned it, I thought age 35 would give it away.

 

[SupersonicMax]

Usually when people talk about transfer value is when they don't have the 25 years in. So my post was entirely based on people who release after their VIE of 9-13 years.

Someone at 35 as per my previous post would never have the 25 years of service. (heck, not even 20 if it was the old model). Even if I didn't specifically mentioned it, I thought age 35 would give it away.

You did mention this:

It seems that the lowest age is 50. Which is basically the same minimum age that you can start drawing your pension.

This is false for the CAF pension.

You can also, at 24 years and 364 days take your transfer value.

 

[dapaterson]

You can also, at 24 years and 364 days take your transfer value.

Provided, on the date of your release, you are under 50 years old.

If you are 50 or above, the TV option is off the table.

 

[SupersonicMax]

Provided, on the date of your release, you are under 50 years old.

If you are 50 or above, the TV option is off the table.

True.

 

[rnkelly]

TV is definitely an interesting option. More financial freedom but with that comes risk and stress for sure.

I think we’re too conditioned to just take a deferred pension when it’s so dependent upon personal circumstances. Ie; life expectancy, estate planning, life-style where you want to spend more earlier in retirement when health is generally better. But that’s just me, not sure if I’ll make it to an immediate annuity.

Medical and dental that comes with the pension is pretty sweet though.

Also, I don’t understand why it ceases to be an option at 50.

1.8 million is pretty good on the ole’ Fibonacci equation to spit out 7300$/month conservatively.

 

[rnkelly]

Shoot, just noticed that I made a mistake on SupersonicMax’s TV number (nice numbers btw!). Since numbers are kinda important to this conversation, ack that it’s 1.6 million. Still good but some preservation of capital will be compromised. You’ll have to die earlier, spend less or get better returns. Somewhat controllable lol.

 

[Humphrey Bogart]

Not sure where you got your age 50 but as soon as you hit 25 years of service, you are entitled to an immediate annuity. For some, that’s 41 years old.

25 year pension for me is 7,300/month before taxes. That’s an equivalent of $3.8M if I retire at 41 assuming death at 85 (today’s dollars). My current transfer value is $1.6M. I am sure the math is similar for other salary brackets. The hassle and uncertainty of investments is just not worth it. I’ll take the financial security.

I think it's situation dependent and how much risk you're willing to assume. A big problem I see potentially arising with DB Pension Plans is potential erosions of PPP due to Inflationary Pressures.

Of course, everything is dependent on how old one is and what they want. I am comfortable assuming the risk that I can invest a TV and if it's allowed to sit and not be touched, it could out perform what one would receive with a Deferred Annuity.

Security or..... risk it for the biscuit

 

[dapaterson]

The CFSA plans are indexed for inflation (and, in fact, for several years received indexing that was greater than CAF pay increases).

There are also Income Tax Act limits that restrict the amount of a TV, which may make a deferred annuity more valuable.

As always, individual circumstances are the determining factor.

 

[Humphrey Bogart]

The CFSA plans are indexed for inflation (and, in fact, for several years received indexing that was greater than CAF pay increases).

There are also Income Tax Act limits that restrict the amount of a TV, which may make a deferred annuity more valuable.

As always, individual circumstances are the determining factor.

Yes they are and taxes are also a consideration. As you say, all situation dependent and what you think you could live with.

 

[Messerschmitt]

The CFSA plans are indexed for inflation (and, in fact, for several years received indexing that was greater than CAF pay increases).

There are also Income Tax Act limits that restrict the amount of a TV, which may make a deferred annuity more valuable.

As always, individual circumstances are the determining factor.

What exactly are the limits on the TV? As in how much it goes into the locked TIFF and how much is received as income? Or are there other limitations? Pension 1800 number said it's generally 50-50 but can fluctuate 40-60. But if someone has 1 mil in TV, one does receive the entire amount correct?

You did mention this:

This is false for the CAF pension.

You can also, at 24 years and 364 days take your transfer value.

That quote was referring to private annuity via financial institution since I replied to that subject. None seem to be offering an annuity if I'm below 50 years old (if let's say I release at 35, get TV and want to buy an annuity privately - that doesn't seem to be an option).

 

[kev994]

None seem to be offering an annuity if I'm below 50 years old (if let's say I release at 35, get TV and want to buy an annuity privately - that doesn't seem to be an option).

you would live too long, I suspect it’s not profitable for them.

 

[dapaterson]

What exactly are the limits on the TV? As in how much it goes into the locked TIFF and how much is received as income? Or are there other limitations? Pension 1800 number said it's generally 50-50 but can fluctuate 40-60. But if someone has 1 mil in TV, one does receive the entire amount correct?

The method the TV is calculated, per the Income Tax Act, places limits on the maximum amount of the TV. The ITA also dictates the calculation of in-limit / out-limit amounts.

While written for the PS (and the discussion of a TV being ana available option in some cases up to age 55 is not applicable to CAF pensions), a decent overview of TVs is at:

Transfer Value - Canada.ca

The Transfer Value section provides detailed information on what is a transfer value and how it is calculated.

www.canada.ca

For more light bedtime reading, CRA guidance on Registered Pension Plans is online at:

Registered Pension Plans - Canada.ca

Rebate information for non-resident individuals who buy eligible goods or short-term accommodation while visiting or travelling on business in Canada.

www.canada.ca

 

[ballz]

I did look into this further, so since it's come back up...

It's pretty uncommon for someone in their 20s/30s to be buying an annuity, so you won't see it advertised, but it is possible. The Sunlife person that did one up for me: "I have to admit, I have not quoted an annuity for anyone your age so I had to play with the calculator and it does allow me to illustrate. So it can be done."

In saying that (and I think it's pretty stupid), even if your transferring the money directly from an RPP to the financial institution you're buying the annuity from, the tax treatment is to tax you on the Transfer Value as income first as opposed to not taxing up front but taxing you on the annuity payments.... that fact pretty much takes away any reason to use your transfer value to buy an annuity.

you would live too long, I suspect it’s not profitable for them.

How long you're expected to live is factored into the equation. An annuity for a 30 year old with $1,000,000 is a lot less than what is offered to a 50 year old. Just like any insurance calculation, the actuaries keep the odds in the favour of the house so that on a broad scale the house always wins. That\s why they're usually set up around the assumption that you'll live to be 90 years old.... the average age of death in Canada is 82, so unless you make it to 90 then they profited. Sure, some people will make it to 90+ but their expenses will be more than covered by all those who don't.