New RRSP Strategy: A Must-Read for all Retirees

Do you worry about outliving your money? If so, you aren’t alone because this has become a common concern in a world where interest rates are low, and life expectancy keeps rising. Well, we could now have a solution from the federal budget, and it’s called an ALDA (Advanced Life Deferred Annuity).

If all goes to plan, this could be more important to retirees in Canada than the deferred OAS and CPP payments (and even the Tax-Free Savings Accounts introduction!).

What’s ALDA?

Scheduled for 2020, an ALDA would allow individuals with registered investment accounts to use 25% of these accounts to purchase an annuity. Although actual payment dates would vary, they would start in the year the individual turns 85 (at the very latest). With a lifetime maximum of $150,000, this amount would be rounded to the nearest $10,000 after being indexed to inflation.

The plan will be available to all those with an RRIF (Registered Retirement Income Fund), Registered Retirement Savings Plan (RRSP), Defined Contribution (DC) pension plan, and other registered plans.

Currently, RRIF is the most popular registered plan decumulation solution where investments include stocks, bonds, cash, ETFs, GICs, and mutual funds. Unless left to a common-law partner, surviving spouse, or a dependent child/grandchild, the account is taxable after the owner dies (withdrawals are also subjected to tax).

For many retirees, annuities are a good option for RRSP holders where they pay a lump sum to an insurance company before then receiving it in retirement every month or year. Often, payments will continue until death, and some have guaranteed periods just in case the individual passes away earlier than expected.

However, the lower interest rates have made annuities less attractive to Canadians in recent years. With this in mind, ALDAs may just come at the right time. For an estate, and even tax and investment purposes, they will certainly help some.

Will an ALDA Help in Your Position?

These days, stocks are too risky for some while conservative mutual funds come with too many fees; there seems to be no middle ground. For those who don’t want to take huge risks in retirement, annuities might just be the answer. Elsewhere, those who can’t rely on income from a defined benefit (DB) pension plan may also benefit from an ALDA. Suddenly, living too long isn’t an issue and individuals can join those with a DB plan to receive payments as long as they’re alive.

Interestingly, the ALDA actually comes with tax deferral opportunities after moving money from a registered account. Up to the age of 85, an ALDA could reduce minimum required RRIF withdrawals.

For anybody still working in their 70s, the mandatory RRIF withdrawals can also be less taxing thanks to ALDA’s income deferral. Of course, we would never recommend choosing a product for tax deferral purposes alone, but it could still be a valuable feature.

For DIY investors who don’t want to manage lots of money, an ALDA could also work here.

Potential Issues

The problem? Financial advisors may just have a conflict of interest considering 25% of their managed investment assets may be lost to an ALDA. Furthermore, investors need to be willing to give up money for their later life (just as they do with defined benefit pension plans).

Will you be tempted to hand over 25% of your RRSP to an insurance company for your future? We appreciate that even an ALDA won’t entice some away from other options. However, there are no financial products that are a perfect fit for absolutely everybody. As long as you realize that an ALDA is now an option and that Canadian retirees having options will always be a good thing, you’ll be in the right place to make correct financial decisions for your future!