Q My wife and I are retired and around 60 years old. We are very financially calm. I also have a substantial indexed defined benefit occupational pension. My wife has a large RRSP from self-employment. It is owned by Manulife (IncomePlus) and was intended to operate as a variable annuity because it does not receive a pension.
Manulife offered her a very substantial “increase deposit” to waive the guarantee and withdraw from the contract. Results were marginal due to high MERs and administrative fees. We are considering taking advantage of this offer and switching to an annuity that guarantees at least the initial lump sum refund (in the event of premature death). The annual annuity payments are significantly higher (almost 1/3 higher) than the minimum guaranteed in her current contract. However, it is difficult to give up total control over part of our pension funds, although we have already partially done so. Any thoughts on what else to consider?
– Thank you, Abel
AND. There is a lot going on in your question, Abel, and a lot to consider when answering.
First, let’s look at the basics of the retirement investment you’re asking about. As you notice, the product your wife purchased is a variable annuity with lifetime income. These products are designed to provide a guaranteed income in retirement, much like an annuity or defined benefit pension plan, but based on a portfolio that you still own and control.
The Variable Annuity and Guaranteed Income Bundle has been designed as a “middle ground” between the options of on the one hand generating retirement income from a portfolio of stocks and bonds, and on the other hand using saved funds to purchase an annuity in retirement to provide a lifetime income. Choosing stocks and bonds does not guarantee a lifetime of income and exposes retirees to the risk of market movements (and declines); whereas electing an annuity usually involves an irrevocable transfer of assets to the life insurer issuing the annuity (subject to various guarantees that may be added to the annuity). While there are many other factors to consider such as time and tax, this is the view from 10,000 feet.
As the number of people reaching retirement age in Canada has increased in recent years, coupled with the decline in defined benefit pensions, insurance companies such as Manulife and others have recognized the need for a product that would provide a “pension-like” income in retirement. — and products like IncomePlus filled that need. Many Canadians purchased this and similar products in the wake of the global financial crisis, when the risk of market collapse was a top priority for future retirees.
The basic mechanic of IncomePlus and comparable products is that the buyer – in this case your wife – invests in segregated Manulife funds, which are themselves relatively expensive funds due to the guarantees they already offer outside of mutual funds, and then the income component or warranty is layered for an additional fee. Then, starting at age 65, the IncomePlus contract guarantees a payout of five percent of the portfolio value per year for the life of you, even if the portfolio value declines, and even if you live a very long time, long enough to completely deplete your original portfolio. The natural buyers of IncomePlus and similar products were risk-averse people who wanted a guaranteed lifetime income in retirement and were concerned about remaining exposed to the volatility of stock and bond markets.
This background brings us to today and your question. Now you’re wondering whether it makes sense to keep your funds invested in the IncomePlus portfolio with its five percent lifetime guarantee; or get out of the contract, collect the “step-up bonus” and potentially purchase an ordinary income annuity that will provide lifetime income to the wife in retirement. Although an income annuity would provide a higher monthly income than the guaranteed income provided by an IncomePlus contract, this higher monthly amount is only available if you transfer the assets used to fund the annuity to the annuity issuer.
A very important concept is that guarantees come at a price. If you want to be sure of an income that will last as long as your wife lives, there are costs involved. And if you want to keep control of your assets rather than handing them over to an insurance company that will provide you with a lifetime income, there are costs involved as well. (These costs are not always financial in nature – they may include more intangible costs, such as liquidity and risk exposure.)
In my opinion, the main question you need to answer is whether you most value the benefits of an existing IncomePlus contract – such as the flexibility to exit the contract and the ability to retain control over your invested funds – or whether you would prefer to maximize the retirement income available from your wife’s funds by using from an income annuity, at the expense of the capital used to purchase the annuity. (The third choice would be to cash out the IncomePlus product and “take a chance” on it, creating income from a portfolio of assets.)
When making your decision, I think there are two additional things to consider. First, if IncomePlus was right for your wife at the time of purchase, what – if anything – has changed in your situation that means withdrawing the purchase is now the right choice? Second, remember that purchasing annuities to generate retirement income is not necessarily an all-or-nothing proposition: annuities can be purchased slowly, over time, using some of your savings to provide a retirement income that adapts to changing circumstances (Your age, preferences, needs and assets).
Hopefully, your initial purchase was made in the context of a financial plan that provides greater retirement income for you and your wife. If so, your question may be answered by reviewing this plan again. If your plan shows that you can tolerate walking away from the contract and potentially purchasing an annuity to provide lifetime income, your wife may want to withdraw the money. However, if opting out puts your plan in jeopardy – for example, if you’re counting on the flexibility of IncomePlus to meet your needs or cover risks in retirement – or simply means you can’t sleep at night, it may be best to stay the course . Ultimately, the decision is based on your specific preferences and circumstances, in the context of your personal financial plan.
Alexandra Macqueen, with files from Jason Pereira of Woodgate Financial Inc. Alexandra is a certified financial planner and retirement expert providing advice through Pension Acuity Partners.
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