Nearing Retirement? Insurance Concepts

Facts: You must wind up your RRSP’s before the end of the year in which you turn 69. At this point, you must either: 1. Withdraw all the funds in cash 2. Set up an RRIF, or 3. Purchase an Annuity.

Since converting to cash makes the whole amount taxable income for the year, the only real choice is a RRIF or Annuity. Both let you make withdrawals over time while the remaining funds stay sheltered from taxes.

Difference between RRIF’s and Annuities A RRIF is essentially a continuation of your RRSP. You simply stop contributing money in, and start taking an income, while retaining control of how the remaining funds are invested. You may take more or less, according to your needs, but all withdrawals are fully taxed in the year they are received. However, RRIF’s are subject to a minimum withdrawal which increases with age, up to 20% at age 94 – so there is no guarantee that the money will last a lifetime.

An Annuity is more like a pension. You buy the contract with a lump sum amount, and in return, receive a guaranteed annual income, usually paid monthly. The payment schedule is fixed, regardless of income needs, and all payments are fully taxed in the year they are received. Once an Annuity is purchased, you no longer have a say in how the funds are invested. But they have a guarantee that you will never outlive your income.

While RRIF’s are the most popular option, Annuities can play a key role in your retirement income plan – either now or later if your circumstances change. That’s because the RRIF balance can be converted to an Annuity at any time.

RRIFAnnuity Flexible income – Minimum withdrawals (% based on age) or withdraw as much as you need Predetermined income No guarantees – once the money is paid out, it’s gone Locked into a regular monthly payment based on capital, life expectancy and interest rates

Annuities A lower interest means a lower monthly payment, so Annuities are less popular during low interest periods. Annuities can still protect against inflation. An indexing option increases payments to keep up with inflation – and an integrated payment option ensures a level income by coordinating Annuity payments with government benefits. rate

RRIF Annuity Investment choice(and risk)No need to manage investments Probability of outliving income Can guarantee income for life. As an option, you can choose to guarantee income payments to your beneficiaries for a minimum number of years in case of death

RRIF’s and Annuities Both can be passed to beneficiaries – With RRIF’s, your remaining income payments can continue to your spouse, or they may transfer it to a RRIF or RRSP. If there is no spouse or beneficiary (subject to tax), the balance of the account is paid to your estate With an Annuity, you can choose options to ensure that the income payments continue to your spouse (called a joint-life annuity) or to your beneficiary as a lump sum representing the remaining guaranteed period (also subject to tax)

Whether you prefer flexibility or security, a clear understanding of RRIF’s and Annuities is essential for planning for a comfortable retirement. Also remember that you may convert the balance of your RRIF to an Annuity contract at any time, or even choose to have both.

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