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Didn't miss out much from the Saskatchewan Pension Plan
April 5, 2018
7:40 am
Norman1
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The SPP quote mentioned is

  • Life annuity (no spouse)
  • Male, almost 60
  • SPP balance of $100,000
  • about $472 per month

I don't agree with comparing the SPP annuity to life annuities with 10-year minimum guarantee unless the SPP annuity also guarantees a minimum of 10 years worth of payments. Also, it is not clear whether the insurance company rates from Cannex are for registered or unregistered funds.

The SPP rate is okay. From the Globe & Mail annuity rates survey, life annuities for

  • single male,
  • age 60,
  • no minimum guarantee, and
  • $100,000 registered funds

are currently from $453.52 to $478.63 per month.

April 5, 2018
10:19 am
christinad
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Good point. It is difficult to compare when the products aren't the same. However, I also believe there may even be more commission on top of the annuity amount bought from the bank or insurance company. Unfortunately, it seems there is no one in these forums who has actually bought an annuity to ask how it works.

The other factor is the SPP is guaranteed by the Saskatchewan government while the annuity is backed by Assuris. I'm not sure which is better.

Edit According to someone on financial wisdom forum, the commissions are included in the monthly quote.

April 5, 2018
7:34 pm
Norman1
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christinad said
Good point. It is difficult to compare when the products aren't the same. However, I also believe there may even be more commission on top of the annuity amount bought from the bank or insurance company. …

Edit According to someone on financial wisdom forum, the commissions are included in the monthly quote.  

That is my understanding as well: The income quoted by the agent selling the annuity is already reduced by whatever commission the insurance company will pay the agent.

GIC brokers have the discretion to reduce their commission in order to offer a GIC with a higher rate. I suspect that annuity agents can do the same.

Life annuities are not that popular because their returns don't seem to be outstanding.

The best rate for $100,000 of registered funds was $478.63/month for a 60 year old single male. According to StatsCan, the latest life expectancy of a 60 year old Canadian male is 23.3 years = 279.6 months.

$100,000 up front. 280 expected monthly payments of $478.63. Zero at the end. That means an expected return of about 2.64% per annum.

April 5, 2018
10:00 pm
Loonie
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That's a dismal calculation, Norman! I'm sure you must be right as you usually are.
In that case, might as well stick with GiCs and keep the principal - at least until the 50 year old becomes 75 or 80; then re-calculate. The annuity does serve to even out the tax burden, which becomes more onerous with higher mandatory minimum withdrawals from RIF as you age.

April 6, 2018
6:34 pm
Norman1
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Monthly payout is higher. But, surprisingly, the return is worst at age 75!

Currently, the best life annuity rate for $100,000 of registered funds for a 75 year old male is $751.96/month. StatsCan life expectancy of a 75 year old male is 12.0 years = 144 months.

$100,000 up front. 144 expected monthly payments of $751.96. Zero at the end. That means an expected return of about 1.34% per annum.

April 6, 2018
8:24 pm
Loonie
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Good grief! sf-surprised

I wonder if it would workout better with non-registered funds.
I'm wondering about how the tax liability works out with the registered funds. I realize the payout is fully taxable, but what happens to the residue retained by the insurance company? Who is liable for the tax on it, and how would the rate be determined? If it gets cashed in somehow when the annuitant dies, then, the older they are when they take out the annuity, the more concentrated it would be when they die (if 100K deposit), so perhaps bigger tax bill? , which is compensated for by lower return rate?? In other words, the older you are when you buy it, the fewer years you have left, so the bigger lump remaining at the end would draw a higher portion of tax?
I hope that makes some sense. Just guessing.

April 7, 2018
8:30 am
Norman1
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The return is worst for non-registered money!

Best rate for $100,000 non-registered funds for 75 year old is $712.66/month.

$100,000 non-registered up front. 144 expected monthly payments of $712.66. Zero at the end. That means an expected return of about 0.43% per annum.

The premium paid is not kept in a separate account for each annuitant. There is a separate legal contract for each annuitant's payments for life. But, the premiums are put into an annuity pool with those of other annuitants.

I suspect the insurance company is taxed on the performance of the annuity pool and not on the performance of each annuity contract.

As for the lower rate of return for the older annuitant, I think part of it is the rate on the government bonds that the premium is invested in. Shorter life expectancy means shorter investment horizon and investing the premium in shorter term bonds with lower interest rate.

The rate is probably affected also by each insurance company's short-term funding needs, like the rates offered for GIC's.

April 7, 2018
8:42 am
Loonie
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hmm.
But wouldn't the insurance company put it all together, like a pension plan does? do you think they really go out and buy a bond for each individual annuitant based on life exp?

April 7, 2018
9:17 am
Norman1
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Yes, the insurance company does pool it all together like a pension plan does.

Not bonds for each individual annuitant. But, bonds, T-bills, and strips for each of the expected monthly, quarterly, and annual batches of payments to the annuitants in the pool.

Adding a new annuitant to the pool, who is expected to be paid $751.96/month for the next 12 years, will require the insurance company to add multiple bonds, T-bills, and strip bonds to the pool to support those additional monthly payouts.

April 7, 2018
9:29 am
christinad
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Has anyone read Retirement Income for Life by Fred Vettese? He is an actuary who recommends annuitizing 30% of your income after age 70 to manage longevity risk. He also writes about the disdain most canadians show annuities. Worh a read

April 7, 2018
9:54 am
Wayno
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christinad said
Has anyone read Retirement Income for Life by Fred Vettese? He is an actuary who recommends annuitizing 30% of your income after age 70 to manage longevity risk. He also writes about the disdain most canadians show annuities. Worh a read  

Is there a key reason why the author would consider an annuity after 70 ?

Many of us don't consider it an option because of the "perception" that it is a low return on investment - especially in the age of low interest rates.

regards,
Wayno

April 7, 2018
11:33 am
Norman1
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Fred Vettese shared some of his findings about annuities in this interview with Globe & Mail Rob Carrick: Youtube: Age and annuities with Fred Vettese and Rob Carrick .

April 7, 2018
2:08 pm
Loonie
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Yes, I'm reading the book right now actually, but am not very far into it. So far, I think it's better than his previous books.

Gordon Pape also writes in favour of buying annuities, but he thinks you should wait a bit longer. As I recall, his reasoning was that an annuity would prevent the high tax bite from high mandatory withdrawal rates of RiFs in later years by evening it out earlier.

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