Advanced Life Deferred Annuities (ALDA)

Budget 2019 Canada Pension

what is a single life annuity

What are advanced life deferred annuities?

A new option to defer some retirement income until age 85

Source: Global News

Another measure that might help working seniors is a proposal to introduce so-called advanced life deferred annuities, or ALDAs.

Annuities pay out a set amount beginning on a certain date and are one of the investments Canadians can buy with funds held in a registered retirement account. Currently, annuity payouts must start by age 71.With an ALDA, however, Canadians would be able to defer payouts until the end of the year their turn 85.

Individuals would be able to hold ALDAs worth up to 25 per cent of their registered retirement holdings, for a maximum lifetime dollar value of $150,000.

Crucially, the value of the ALDA would not be included in the math the government uses to calculate how much seniors over 71 must withdraw from their registered retirement income funds (RRIF) every year, Doug Carroll, a tax and financial planning expert at Meridian said.

The measure would allow Canadians to keep more of their money into their RRIFs for longer, Carroll said.

This will likely be welcome news to working seniors, for which RRIF withdrawals add to earnings as taxable income.

It would also help Canadians cordon off a portion of their retirement savings for their later retirement years, which are often the most expensive due to higher healthcare costs.


Federal budget introduces annuities deferred to age 85

The plan will allow retirees to keep more savings tax-free until later in retirement

The federal government is permitting annuities that would allow retirees to move some savings out of their registered retirement funds to an annuity deferred until age 85.

The tax rules generally require an annuity purchased with registered funds to begin after the annuitant turns 71.

The Liberal government is amending the rules to permit seniors to purchase an advanced life deferred annuity (ALDA) under certain registered plans—an annuity whose commencement can be deferred until age 85. The plan was introduced Tuesday in the federal budget.

Doug Carroll, head of tax, estate and financial planning at Meridian Credit Union, said the financial industry has for years asked to push back the age at which RRIFs have to be drawn down.

“This addresses that to a large extent,” he said. “It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.”

For clients who don’t need to take out RRIF minimums but are forced to, “this may provide an avenue for those people to keep more of that money remaining in a tax-sheltered place by making use of these ALDAs,” he said.

The ALDAs would reduce the amount retirees are forced to withdraw annually from a registered retirement income fund (RRIF) or other registered plan while preserving savings until later in retirement. The value of the ALDA would not be included in the minimum withdrawal calculation.

The ALDAs, which will apply beginning in the 2020 tax year, will be qualifying annuity purchases under an RRSP, RRIF, deferred profit sharing plan, pooled registered pension plan and defined contribution pension plan, the budget says.

Lifetime limits will be 25% of a specific amount of a qualifying plan, calculated as:

the value of all property (other than most annuities, including ALDAs) held in the qualifying plan as at the end of the previous year; and any amounts from the qualifying plan used to purchase ALDAs in previous years.

If the value of an ALDA purchased in previous years exceeds the 25% limit for a particular year due a decline in qualifying plan assets, the retiree won’t be forced to surrender or dispose of the annuity, the budget says.

ALDAs will also have a lifetime limit of $150,000 from all qualifying plans, indexed to inflation for taxation years after 2020, rounded to the nearest $10,000.

To qualify as an ALDA, annuity contracts will need to satisfy the following requirements:

  • provide annual or more frequent payments for the annuitant’s life (or for the joint lives of the annuitant and annuitant’s spouse or common-law partner) beginning at the end of the year the annuitant turns 85;
  • when the annuitant under a joint-life contract dies prior to commencement, the annuity will provide payments to the surviving spouse or common-law partner no later than when the payments would have started for the annuitant;
  • provide periodic payments that are equal, except: when adjusted annually to inflation or a fixed rate specified in the annuity contract not to exceed 2% per year; or reduced on the death of the annuitant or the annuitant’s spouse or common-law partner;
  • following the death of the annuitant, any lump-sum death benefit to a beneficiary should not exceed the premium paid for the annuity less the sum of all payments received by the annuitant; or, in the case of a joint-life contract, the sum of all payments received by the annuitant and the annuitant’s spouse or common-law partner prior to death;
  • permit a refund to the annuitant of any portion of the premium paid for the contract to the extent that the premium paid for the contract exceeded the annuitant’s ALDA limit; and
  • provide no other payments, such as commutation or cash surrender payments, or payments under a guarantee period.

Permitting additional types of annuities in registered plans

An RRSP must mature by Dec. 31 of the year in which you turn 71. On maturity, the funds must be withdrawn, transferred to a registered retirement income fund (RRIF) or used to purchase an annuity. In exchange for a lump-sum amount of funds, an annuity provides you a stream of periodic payments, generally for a fixed term, for your life or for the joint lives of you and your spouse or common-law partner.

To provide Canadians with greater flexibility in managing their retirement savings, the budget proposes to permit two new types of annuities for certain registered plans:

“advanced life deferred annuities” will be permitted under an RRSP, RRIF, deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP)

“variable payment life annuities” will be permitted under a PRPP and defined contribution RPP.

These measures will apply to the 2020 and subsequent taxation years.

Advanced Life Deferred Annuities (ALDA)

An ALDA will be a life annuity the commencement of which may be deferred until the end of the year in which the annuitant attains 85 years of age. There are other requirements to be considered an ALDA, limits on how much of your registered plan can be invested in an ALDA and penalties related to non-compliance which are not discussed here.

Variable Payment Life Annuities (VPLA)

The current tax rules generally require that retirement benefits from a PRPP or defined contribution RPP be provided to you by means of a transfer of funds from your account to an RRSP or RRIF, variable benefits paid from your account or an annuity purchased from a licensed annuities provider. However, in-plan annuities (annuities provided to members directly from a PRPP or defined contribution RPP) are generally not permitted under the current tax rules.

The budget proposes to amend the tax rules to permit PRPPs and defined contribution RPPs to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants. There are other requirements under these proposed rules which are not discussed here.

People interested in longevity insurance: The budget clears the way for the creation of advanced life deferred annuities that would kick in at the end of the year you turn 85. With an annuity, a lump sum investment is turned into a preset flow of cash for life. This particular annuity would be a way to ensure you don’t run out of money if you live to an advanced age.

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