An annuity remains a challenge on the age of death, financial planners point out. It also serves as a basis for reflection on the risk of longevity, which is only growing. Second of two texts.
Data from the Quebec Statistics Institute tells us that in 2022, life expectancy at birth is estimated at 84.1 years for women and 80.5 years for men. It is 82.3 years for men and women combined. But once the age of 65 is reached, it stands at 21.8 years for women and 19.4 years for men. We agree, all this is just an average. More precisely, according to the survival probability table of the Quebec Financial Planning Institute, a 65-year-old man and woman have a 50% chance of reaching 89 and 91 years of age, respectively.
Furthermore, in an email, Sun Life highlights the fact that the number of centenarians in Canada has reached a peak, having increased “by 64% in just 10 years”. The Chair in Taxation and Public Finance (CFFP) at the University of Sherbrooke noted that the number of centenarians in Quebec could double by 2035 and more than tenfold by 2065, going from 3,596 to 44,490 individuals. . Highlighting a contrast, Sun Life cites the findings of a survey conducted by Ipsos between August 30 and 1er September 2023 in which we observe that, despite these projections, almost half (46%) of baby boomers do not plan to use a guaranteed life income type vehicle.
What emerges from all this is that annuities and guaranteed income segregated funds offered by insurance companies remain little-known products, which deserve a little more attention in the current environment of higher interest rates. “We are entering a new dynamic of rising interest rates, market volatility and geopolitical tensions. The investments that Canadians relied on to build their wealth are no longer as effective as before,” the financial institution rightly points out.
Working in retirement
This was discussed in a previous column. From the outset, the planning exercise will involve the decision whether or not to take up employment at retirement age. It has been demonstrated that, from a purely mathematical point of view, this decision is largely judicious on a tax basis, with almost all of the simulations or cases studied by the CFFP concluding at an effective marginal tax rate generally well below by 50%. The exercise also involves the choice of advancing or delaying benefits from public retirement plans.
Thus, added to the incentive to work is the possibility of postponing the start of payment of the Old Age Security pension and the Quebec Pension Plan (QPP) pension. For the latter, if the start of benefits is brought forward to age 60, the amount paid is reduced by 36% compared to that paid at age 65. Conversely, if it is postponed until age 70, the pension will be increased by 42%. “Thus, for someone entitled to the maximum pension, deferring to age 70 rather than advancing to age 60 more than doubles the annual pension, the gap between the highest amount at age 70 and the lowest at age 60 being $11,738 in 2022 dollars ($21,361 instead of $9,628),” the CFFP has already measured.
In this other study, the Chair calculates that often “the option of deferring public benefits is an avenue providing significant savings in private savings necessary for retirement. Conversely, there are rare situations where anticipating the start of benefits appears favorable.” And the further the age of death, the more true this is. At an age of death of 95, “delaying public benefits as much as possible is the most beneficial approach, except for low earners.” And the CFFP adds: “It is clear that, even by reducing the age of death by 10 years, the postponement of public benefits remains more favorable than [commencer à les percevoir] at the normal age for starting benefits. Even a sensitivity analysis for a beneficiary with an age of death of 75 years did not lead to the choice of [commencer à recevoir] the QPP pension at age 60. »
In fact, starting to receive the QPP pension at age 60 turns out to be a costly choice, except in the specific case of those with a low life expectancy, whose age of death is less than 73 years, or in the case a low target income. It should be added that, in the latter case, in Quebec, a person aged 70 or over on December 31, 2023 may be eligible for a rather high tax credit for support for seniors.
Dip into savings
In the presence of retirement savings, such deferral of public annuities may mean that retirees must draw more on their savings in the early years of retirement in exchange for larger public benefits later.
Which is not a bad choice, because the QPP annuity is life-long and indexed, and offers protection against the risks of lower returns, inflation and, precisely, longevity. From this point of view, specialists maintain that, since private retirement savings can expose the contributor to the risk of lower returns and market fluctuations, the classic approach consists of first putting one’s risk capital at risk to contribute to then call on the protection offered by public plans, which are defined benefit plans indexed to inflation.
This is especially true since retirement savings accumulated in an RRSP have a maturity date, with the amounts having to be withdrawn from the registered plan no later than the year in which the holder reaches age 71. Note that, despite the sharp increase in life expectancy, this age limit has never been raised since the creation of the RRSP in 1957, it is noted. But that’s another debate.