The premium for ALDAs must be paid from qualifying registered plans.sorbetto/stock
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Advanced life deferred annuities (ALDAs), which were recently introduced in Canada, fill a need for Canadians in specific situations, but some advisors aren’t convinced these new products will meet the needs of most in retirement.
Currently offered only through Desjardins Insurance, ALDAs enable clients to buy an annuity that starts payments as late as the end of the year they turn 85, providing protection against longevity risk and a tax-deferral opportunity. The premium must be paid from qualifying registered plans – including registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and deferred profit sharing plans – and is limited to 25 per cent of the plan’s value with a lifetime dollar limit of $170,000 in 2024 (indexed to inflation).
“We allow a five-year deferral period [before payments start] in our standard annuities, but for this product, the deferral period can range from five years to 30 years,” says Philippe-Olivier Dumas, section manager, product development, at Desjardins Insurance’s guaranteed investment funds and annuities team.
Desjardins Insurance’s ALDA product, launched in December 2023, sets the deferral period in stone once selected, but beneficiaries are protected against the financial risk of premature death with a cash refund guarantee that returns the premium amount less annuity payments received.
“We know the retirement system in Canada is not perfect, and not all Canadians have money set aside for retirement,” Mr. Dumas points out. In that context, he says ALDAs can supplement other guaranteed sources of retirement income at a “relatively low cost.”
Three use cases
Adam Chapman, certified financial planner and founder of YESmoney in London, Ont., would like to see more insurance companies step into this market to introduce competition. But he says his biggest concern related to ALDAs is most retirees don’t know what their tax situation will be when they’re 85.
In many cases, they could be a widow or widower with no ability to split retirement income with a spouse. In that case, they may defer income to a time when they’re in a substantially higher tax bracket.
That said, he has identified at least three situations in which clients may benefit from ALDAs.
If a retiree previously purchased an annuity without indexing to inflation to save costs or has a defined-benefit (DB) pension plan without indexing (or with indexing at the discretion of the pension manager rather than guaranteed), an ALDA makes it possible to add inflation protection manually at a time and in an amount the client chooses.
“You could retire at 65 and then say, maybe we want to throw our next little bump up of income on our annuity at 75, and then do another one at 85,” he says. “That’s a very broad use case that I could see working for a lot of retirees.”
Mr. Chapman can also see ALDAs being used by people who don’t own a home they can sell to fund retirement home costs. In that case, the ALDA secures income for that purpose, freeing retirees to spend more and enjoy the early years of their retirement.
A third way he thinks ALDAs can be helpful is to protect future income from the impact of poor decision-making by a power of attorney – or simply to make things easier for a power of attorney.
“It’s a very specialized tool, … but in the right circumstances, [ALDAs] offer some cool new solutions to problems we couldn’t really solve before,” Mr. Chapman says.
Adding to the toolbox
All annuities offer guaranteed income that can provide retirees with peace of mind as well as eliminate market risk and free investors from having to make investment decisions, says Willis Langford, senior retirement income planner and co-founder of Langford Financial Inc. in Calgary.
He says anyone who doesn’t have a DB pension plan should have some money in an annuity. However, he isn’t sold on ALDAs for most clients.
“The whole point of retirement savings is to be able to enjoy your retirement,” he says.
“[Should] you sacrifice your lifestyle now so that you can have money 20 or 30 years into the future, [or focus on] the most enjoyable years of retirement, somewhere between, say, 60 and 80 [years of age]?”
Mr. Langford also believes ALDAs contain a built-in contradiction. After all, the people most likely to consider ALDAs – those with large RRSPs or RRIFs – are also the least likely to need the protection these products offer from longevity risk. On the flip side, people who don’t have much money will be understandably reluctant to lock away 25 per cent of a registered plan until age 85.
“The value would be for a client [with] a large RRSP or RRIF, and they’re going to be required to take out that minimum payment every year, and it’s going to be more than they want,” he says. “It could impact other tax credits like the age 65 tax credit, and it could impact [Old Age Security] clawbacks.”
In that situation, an ALDA “could help them be able to shift more money out into the future to reduce the amount of OAS clawback or taxes paid.”
Mr. Langford adds the time is right to consider annuities of all kinds, with higher interest rates pushing breakeven points down.
Nevertheless, he advises, “Lead the conversation with the client and see if [an ALDA] is a fit. Don’t lead with the product and try to make it fit in everybody’s situation.”
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