Chapter 14: Retirement Planning

Question 1

What are the 3 cycles that can be expected during retirement?

Answer 1

1. Active years
2. Slow down years
3. Late years

Question 2

What do annuities trade for guarantees?

Answer 2

Investment returns. When purchasing an annuity, you’re assuming a relatively low rate of return in exchange for a guaranteed stream of income.

Question 3

What are the 2 basic annuity structures? How are they different?

Answer 3

Life annuity - can only sold by an insurance company, and is designed to provide income until the death of an annuitant.
Term certain annuity - pay benefits for a pre-determined amount of time based on the amount of money invested.

Question 4

What happens if the annuitant of a term certain annuity dies with annuity benefits outstanding?

Answer 4

Normally has no beneficiary, so annuity benefits will pass on to the estate, and then to heirs. Insurance companies may allow a named beneficiary.

Question 5

Why is there more risk involved a joint life annuity than a single life annuity?

Answer 5

The insurer takes on more risk as the annuity will have to pay until both annuitants die.

Question 6

How do insurers calculate benefits for joint life annuities?

Answer 6

Benefits will be reduced since the insurer takes on more risk with more than one annuitant. The benefit will be based on the age of the youngest annuitant, and then reduce that benefit amount based on the age of the older annuitant.

Question 7

If two 80 year olds purchase a joint annuity and have their benefit based approximately on the age of a single 75 year old for benefit purposes, what would a 60 year old and 80 year old purchasing a joint annuity likely have their benefit based on?

Answer 7

For joint annuities, the insurer uses the youngest age to determine the benefit amounts. They then reduce the benefit amount based on the second annuitant. In this case, their benefit would likely be based approximately on the age of a single 55 year old.

Question 8

Which gender tends to obtain a higher life annuity benefit?

Answer 8

Men, as women tend to live longer.

Question 9

What is an impaired annuity?

Answer 9

A type of annuity one can apply for if the annuitant’s health is failing and is based on a shortened life expectancy. Typically requires a doctor’s indication that life expectancy is around 3 years or less.

Question 10

What are the (4) types of life annuities?

Answer 10

1. Life straight annuities
2. Life annuities with guarantees
3. Joint and last survivor annuities
4. Temporary annuities

Question 11

What is a life straight annuity?

Answer 11

An annuity based on only one life. When the annuitant dies, benefits end. This type of annuity represents the least risk for the insurer and will pay a larger benefit than other types.

Question 12

What is a life annuity with gurantees?

Answer 12

A life annuity with a guaranteed period (such as 5, 19, or 20 years) where an annuity benefit will continue to be paid to a beneficiary up to the end of the guarantee period. The benefit could be a lump sum or continuous annuity income.

Question 13

What is a joint and last survivor annuity?

Answer 13

Life annuity with income provided until the last of two annuitants are deceased. These can be structured so the last survivor only received a reduced amount of income (such as 66.67%).

Question 14

What is a temporary annuity?

Answer 14

A life annuity that pays until the earlier of the end of the term or the mortality of the annuitant (bridge benefits are a temporary annuity). This will provide higher benefits than a term certain annuity since the insurer is able to fund some of their promise with mortality credits.

Question 15

Who is a life straight annuity appropriate for?

Answer 15

Typically for a single person in retirement with nobody depending on them financially. Not appropriate for someone who is concerned about the financial consequences of dying too soon.

Question 16

What are the (2) features that can be added to an annuity?

Answer 16

1. Commutability
2. Indexing

Question 17

What does a commutable annuity allow?

Answer 17

Allows the investor to commute the value built up in the annuity. The monthly annuity benefit will be less than that of a non-commutable annuity, but the investor can choose to access funds in the annuity during the accumulation phase.

Question 18

What is the maximum indexed amount allowed within a registered annuity?

Answer 18

4% per year.

Question 19

What is an accumulation annuity? What are 2 other names for it?

Answer 19

Also known as a deferred annuity or GIF. Deigned to allow the client to use the annuity to accumulate value prior to starting. Deferred annuities will often use an IVIC (seg fund) or GIC type of structure during the accumulation phase.

Question 20

How are non-registered annuities taxed?

Answer 20

Income is based on a combination of return of capital and interest. The ROC is not taxed, while the interest is taxed as regular income.

Question 21

What is an accrued rate annuity?

Answer 21

Non-registered annuity where as the annuity pays benefits, the amount of principal decreases because a portion of every payment is return of capital. Eventually, the amount of principal will be reduced to zero, resulting in a declining tax bill over time as less principal will be earning interest.

Question 22

How does the taxation of a registered annuity differ than that of a non-registered annuity?

Answer 22

The registered annuity will produce a fully taxable stream of income, while a non-registered annuity allows for only a portion of the income stream (the interest portion) to be taxable. The remainder is return of capital.

Question 23

What is a prescribed annuity?

Answer 23

When a non-registered annuity meets certain conditions, it is possible to use prescribed taxation (proportional taxation). The tax bill would be levelled out over the term of the annuity, rather than heavy upfront taxation and little to no taxation later on as the principal and interest decrease each year.

Question 24

How is the death benefit of a registered annuity taxed (when purchased with RRSP, LIRA, RRIF proceeds)?

Answer 24

If taken as a lump sum, the full value of the DB is taxed to the deceased annuitant.
If taken as an income benefit by a spouse or CL partner, the spouse can elect to receive the ongoing income, taxable in the spouse’s hands.

Question 25

How is the death benefit of a registered annuity taxed (when purchased with RPP, LIF, or DPSP proceeds)?

Answer 25

If taken as a lump sum, full value of the DB is taxable to the BENEFICIARY (unlike one purchased with an RRSP for example where it’s taxable to the deceased annuitant). If taken as an income by a spouse or CL partner, it’s taxable in the spouse’s hands.

Question 26

How is the death benefit of a non-registered annuity taxed?

Answer 26

If taken as a lump sum, there may be a small amount of tax payable based on accrued growth in the year of death. If so, it is taxable for the deceased annuitant. If an income is taken by a spouse or CL partner, the spouse will assume any tax responsibilities for income generated after death.

Question 27

What are the 3 primary types of variable annuity contracts with segregated fund bases?

Answer 27

Guaranteed Minimum Withdrawal Benefit (GMWB)
Guaranteed Lifetime Withdrawal Benefit (GLWB)
Guaranteed Income Fund (GIF)

Question 28

How does a variable annuity differ from an IVIC?

Answer 28

It takes the form of an Individual Variable Annuity Contract (IVAC)

Question 29

How does the accumulation phase of an Individual Variable Annuity Contract work?

Answer 29

There is a guaranteed amount of simple interest growth on the original invested principal, and the principal is invested as well. Whichever one performs better provides the base for income at a certain age.

Question 30

What happens if investment returns are better than the total of income taken + mgmt fees during the income phase of a variable annuity contract?

Answer 30

The income base would increase, offering a degree of inflation protection as markets tend to perform well when inflation is high.

Question 31

How does a reverse mortgage work?

Answer 31

A reverse mortgage combines a home equity line of credit with an annuity. Equity built up in a client’s home is converted into either a line of credit or an annuity.

Question 32

Why does provincial legislation often require candidates of a reverse mortgage to obtain independent legal advice?

Answer 32

To demonstrate capacity and comprehension.

Question 33

What are the tax consequences of a reverse mortgage?

Answer 33

None.

Question 34

What is the primary risk for borrowers participating in a reverse mortgage?

Answer 34

The greatest risk is that the client starts a reverse mortgage, then must leave their home a short time later. The lender will collect on the original principal and any accrued interest. Plus, the administrative and legal expenses of starting and ending the revers mortgage contract will be costly.

Question 35

What terms are reverse mortgages offered in?

Answer 35

Terms of up to 5 years, like traditional mortgages.

Question 36

What happens if you do a reverse mortgage and have to move to a new home?

Answer 36

The reverse mortgage would need to be wound up as the arrangement can only stay in place while a borrower is a resident of the property.

Question 37

What happens to OAS/US Social Security if someone primarily lived in the US but is retiring in Canada and does not have enough years in Canada (10) to qualify for OAS?

Answer 37

If there is not sufficient residency to collect OAS, but there is at least 1 year, then years of residency in the US can be counted towards the OAS residency test.

This is also true for the US, except there must be at least 6 quarters of work (1.5 years of work) to qualify for US Social Security with some Canadian residency.

Question 38

Are you able to collect CPP & OAS as well as US Social Security?

Answer 38

Yes, if an individual has enough credits or residency accrued in both countries. Although the benefits would most likely not be collected in full.

Question 39

What happens if a retiree in Canada is collecting a private sector pension from an employer in another country that is intended to be tax-free?

Answer 39

CRA generally regards these pensions as taxable, but if the individual writes a letter to the CRA explaining that it was contributed to with after-tax dollars, it may be possible to have the pension income received tax-free.

Question 40

What is one of the biggest risks with collecting a foreign pension?

Answer 40

Currency risk.

Question 41

What is the primary concern with a business owner who has the choice between taking salary or dividends in retirement?

Answer 41

Dividends are grossed-up, and the grossed-up amount impacts the OAS clawback.

Question 42

What is GAINS?

Answer 42

Ontario program called Guaranteed Annual Income System that provides a modest monthly benefit ($83/month) to ensure that an individual receives a minimum amount of income (a standard of living). The amount was $1992/month as of the date of the text.

Question 43

What is an insured annuity?

Answer 43

An insured annuity is essentially a prescribed life annuity and a term life insurance policy, purchased together. An annuity provides a guaranteed regular income stream, while a term 100 life insurance policy provides a cash payout upon death.