 Retirement Planning
Turning your Registered Retirement Savings Plan, or RRSP, into retirement income is a major financial decision. Canadians have been allowed to save for retirement on a registered (tax-sheltered) basis for many years and many will accumulate a substantial sum of money.
Canadians must convert their RRSPs and locked-in RRSPs into a form of income by the end of the year in which they turn 69 years of age. Making the choice that's right for you is an important life decision. With all the changes that retirement brings, you need to make the best use of your RRSP savings to enjoy your retirement to its fullest.
CHOICES
When it comes to converting your RRSP into income, there are more options available to Canadians today than ever before. Depending on your preferences and goals, you can choose just one option or a combination. Some of today's options are flexible so if your financial needs change, you can select new options that best meet your changing needs.
CASH
A straightforward option is to convert your RRSP money into cash. If you choose this option, you should be aware that any amounts received from your RRSP must be included in your income, in the year you receive it. This means paying tax on the entire sum you receive from your RRSP.
RRIF
A Registered Retirement Income Fund, or RRIF, is a flexible income option that allows you to: • manage your investment mix according to your personal preferences • set up payment amounts and frequency to suit your individual needs, and withdraw extra cash as you need it.
ANNUITY
The oldest, and likely the best-known option is the annuity. An annuity can provide you with regular income for the rest of your life or for a certain number of years.
LIF
A Life Income Fund, or LIF, allows the transfer of locked-in funds (i.e. funds from a pension plan when you terminate employment, locked-in RRSP or locked-in retirement account (LIRA)) to a retirement product that is essentially as flexible as the RRIF. A LIF can offer investment and payout flexibility with a set minimum and maximum each year.
RETIREMENT INCOME IS TAXABLE
It is important to remember in your retirement planning that all income received from a registered annuity, RRIF, LIF, LRIF, is taxable in the year you receive it. The cash option A straightforward option to converting your RRSP is to turn it into cash. A word of caution if you choose this option – any amount received from your RRSP must be included in your income, in the year you receive it. This means paying tax on the whole sum withdrawn. The annuity option
WHAT IS AN ANNUITY?
An annuity is a fixed annual allowance provided by an investment. An annuity can provide a guaranteed regular income for the rest of your life or for a specified number of years. The amount of income provided through an annuity is generally determined at the time of purchase, and will depend on: • the amount of money deposited, the current interest rate, your age, your sex, and the number of years for which the company promises to make payments. You decide how often you wish to receive payments (ranging from monthly to annually) and if you want your payments indexed to help offset inflation.
TYPES OF ANNUITIES
Life Annuities are offered only by life insurance companies, which are required by law to set aside reserves to guarantee the payments they have promised. When a life annuity is used to provide retirement income, a minimum guaranteed number of payments can be selected to provide a death benefit to your beneficiary if you die before the end of the guarantee period. There are two types of life annuities:
- Single Life Annuity – payments are guaranteed on your life. You can select a minimum guaranteed payment period that will provide a death benefit to your beneficiary if you die before the end of the guarantee period.
- Joint and Survivor Life Annuity – guarantees an income for the lifetimes of you and your spouse. This type of annuity can also have a minimum guaranteed payment period to provide a death benefit in the event that both annuitants (i.e. you and your spouse) die before the end of the guarantee period. If you are purchasing an annuity with locked-in pension funds and you have a spouse, you are required to purchase a joint and survivor life annuity. You may purchase a single life annuity only if your spouse consents in writing.
- Fixed Term (Term Certain) Annuities may be offered by banks and trust companies as well as by life insurers. Legislation requires a term certain annuity funded by RRSP money to continue until the time you or your spouse reach age 90. At that time, the payments will stop. The major differences between the life annuity and the term certain annuity are the amount of income they provide and the benefit to your heirs.
OTHER TYPES OF ANNUITIES
A Deferred Annuity is just as its name suggests. You can purchase an annuity now and your income payments can be deferred to a specific date in the future. For registered funds, the annuity must be purchased by the end of the year you turn 69, and income payments must start by the end of the year you turn 70. You are also required to take a full year's worth of payments in this first year. The advantage here is that you can lock in interest rates today, even though you don't want the income until some time in the future.
Accelerated (Impaired) Annuities are available for people with health problems that will affect their life expectancy, such as a history of heart problems, cancer or high blood pressure. With this type of annuity, life insurance companies will pay out a higher monthly amount than to someone who has excellent health. Medical evidence is required to qualify for this type of annuity.
The RRIF option
WHAT IS A RRIF?
A Registered Retirement Income Fund, or RRIF, is a registered account that allows you to continue the investments held in your RRSP on a tax-sheltered basis, while paying you an income for as long as you choose or as long as there is money available in the plan. A RRIF can be flexible in providing your retirement income, and just like an RRSP, you can own more than one RRIF at a time.
RRIF INVESTMENT OPTIONS
Different types of RRIF plans offer different investment options. A Daily Interest Account is a temporary account that usually pays daily interest at a low variable rate. You can access your money at any time without penalty or you can invest it for longer terms when you feel interest rates are more acceptable.
With a Guaranteed Interest Contract (GIC), your investment term can usually range from one to ten years. You pick the length of term and your money earns that guaranteed interest rate over the term specified. At the end of that term, you can choose to reinvest for a term that suits your needs.
Some RRSP plans allow you to transfer assets from existing terms intact, giving you flexibility to convert to a RRIF at any time. Another option is Investment Funds. Your RRIF can hold segregated or mutual funds where the performance is tied to the underlying investments held in the fund. These are typically based on the stock and/or bond markets, and returns will fluctuate with the market's performance.
INCOME PAYMENTS
Most RRIFs give you a choice of monthly, quarterly, semi-annual or annual payments. As well, a variety of income payment choices are available including:
- minimum payment (the legislated RRIF minimum for that year) • earned interest payment (the greater of the interest the plan earns each year and the legislated minimum payment)
- level amount (a consistent payment amount at the interval you choose as long as it is not less than the legislated minimum)
- indexed amount (you choose the index – e.g. 2%, 3% or more per year, as long as the payment is not less than the legislated minimum).
Extra cash withdrawals may be made as you require them, depending on the terms of your plan. However, charges may apply. Whatever option you choose, you should remember that any payment received from your RRIF is taxable and must be included in your income in the year you receive it. |
