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Is now the time for annuities?
November 2020
  Shrinking market
In spite of annuities’ benefits, low rates have hurt demand
for these products. As a result, some insurance companies have shifted from annuities to selling products such as segregated funds, which are not as sensitive to inter- est rates.
For example, Manulife Finan- cial Corp., once Canada’s largest provider of fixed annuities, left the business in June 2018. Other insur- ers, including Sun Life Assurance Co. of Canada, Canada Life Assur- ance Co. and Industrial Alliance Insurance and Financial Services Inc., still offer fixed annuities.
“It’s not that insurance compan- ies have taken certain annuities off their shelves, but some companies — for example, Standard Life [As- surance Co. of Canada] — have dis- appeared from the marketplace,” says John Beaton, annuity broker with Beaton Annuity Services in White Rock, B.C.
“None of the Canadian insurance companies actively selling annuities offer exactly the same benefit for the same cost,” Beaton adds.
 Low rates are here for the foreseeable future, but guaranteed income can still work for certain clients
l BY DWARKA LAKHAN annuities can help clients seek-
ing a guaranteed and predictable source of income for a defined period — or for life. Annuities also can play a useful role in estate planning.
“Annuities are one of the best ways to plan for retirement if you are worried about volatility in the market, feel you will run out of money before you die and do not want to manage the investments,” says Ahilan Balachandran, founder and CEO of LifePlan Investments Inc. in Markham, Ont.
That said, interest in annuities has waned in recent years because inter- est rates have hovered around zero — a level at which they’re expected to remain for a few more years. “Annuities are not that beneficial to clients in a low-interest environment because they are locked in with low interest for the rest of their lives,” Balachandran says. “Annuities are very popular when interest rates are high, but less preferred in low-interest periods.”
However, prevailing interest rates may not be the most important factor for clients who want to avoid investment risk while receiving a fixed retirement income.
“After 35 years of being in the busi- ness of selling annuities, I conclude that rates are not the primary consideration for a person to purchase an annuity,” says John Beaton, annuity broker with Beaton
Annuity Services in White Rock, B.C. “People are not as worried about interest rates as they are about establishing a life- time stream of income.”
Beaton adds that annuities often pro- vide peace of mind: “Some people under- stand that a time will come when they will suffer from diminished capacity to handle their affairs. Not having to worry about how things will be paid is more important.”
Jim Ruta, president at Advisorcraft in Burlington, Ont., says that now is a par- ticularly good time to consider annuities because financial markets’ performance is uncertain. “You can guarantee yourself a multiple of what interest rates are with an annuity,” he says.
Balachandran suggests that clients con- cerned about locking in at low rates could consider laddering annuity purchases — buying annuities at different times to benefit from different interest rates.
annuities primer
Beaton says there are two main types of annuities: life annuities, which provide guaranteed income payments for as long as the annuitant lives; and term-certain annuities, which provide guaranteed income for a defined period.
Variable annuities (a.k.a. segregated funds), yet another type, provide a com- bination of fixed and variable income that changes over the life of the annuity.
With life annuities, a client can choose to add a joint life annuity option, so the product continues to provide income pay- ments to the client’s spouse after the client dies. Balachandran cautions that if only the annuitant is named in the annuity and there is no guaranteed period of income payments, the benefit of the annuity will be lost if the person dies earlier than expected.
In the case of a term-certain annuity, the client’s beneficiary receives the bal- ance of the guaranteed income payments should the client die before the guarantee period runs out.
An inflation-protection rider added to a client’s annuity will increase income from the annuity each year by a fixed percent- age to help offset inflation. However, the percentage of the increase is not neces- sarily linked to the consumer price index.
Still, annuities aren’t for everyone — particularly not “the very rich,” says Beaton. That’s because these people are unlikely to run out of money during retirement. Clients with employer-sponsored defined- benefit pension plans may not need annu- ities either, as such plans may provide pension payments for life.
pros and cons
Annuities can be an effective estate- planning tool because the annuitant can name a beneficiary to receive all or a por- tion of the annuity’s investments. Having a named beneficiary avoids the probate process and its associated fees.
Another major benefit: “The income qualifies for tax credits and pension income splitting,” says Balachandran.
One disadvantage of buying annuities is the large upfront investment required, which usually is at least $50,000. Once the money is invested, the client can’t access it and usually can’t change or cancel the annuity contract except in certain cir- cumstances — for a fee.
Furthermore, when investing in annu- ities at low rates, your clients forgo the potential for higher market returns — albeit by removing investment risk.
Annuities providers have a ready reply to that cost, says Ruta: “Those who
income.” Therefore, any opportunity to shift income from the higher-income spouse to the lower-income spouse can be tax-efficient.
For example, the higher-income spouse can make a spousal RRSP contribution once they have made their own RRSP contribution, provided the higher-income spouse has sufficient RRSP room.
The contributing spouse will bene- fit from the tax deduction and receive a tax refund, while the lower-income spouse will benefit from tax-free growth in their RRSP. However, Di Pietro cau- tions, “spousal contributions are more of a long-term consideration” and should not necessarily be used when there is only a temporary change in circumstances.
In certain cases, married clients who are collecting pension or RRIF income might have still been working to supple- ment their incomes, with one partner earning more than the other during the year. George advises that such clients, as long as they are 65 or older and living together, can consider splitting their pen- sion or RRIF income to reduce their total taxes payable as a couple. Typically, the spouse with the higher pension income can elect to split eligible pension income received in the year with their spouse or common-law partner, which can result in a significant reduction in taxes payable.
bemoan the loss of liquidity or capital upon early demise can also [be] guaran- tee[d] a minimum payback on their life annuity [of] 10, 15 or 20 years. The longer the guarantee, [however], the lower the potential income paid out.”
Ruta adds that deciding the optimal annuity terms “is a balancing act based on client needs and wants, but it can be done effectively.” IE
In addition, Di Pietro suggests, clients can choose “to extract [more] money out of their RRIF” to meet cash-flow needs and end up paying less taxes than they nor- mally would in a regular year.
Blair suggests that clients can also engage in tax-loss selling to free up addi- tional cash flow. Not only can losses be carried forward indefinitely, they “can be carried back for up to three years to offset any gains that were made in those years,” he says, and thus can result in a tax refund.
In a similar vein, clients can trigger additional income, George says, by sell- ing investments that have appreciated in order to realize capital gains. In a low- income year, those clients will pay less taxes on those gains by virtue of being in a lower tax bracket.
George also suggests that a low-income year could be a good time for clients to sell investments held in a non-registered account and use the proceeds to buy back those investments within a TFSA. The taxes those clients pay will be less in a low-income year, while the invest- ments will benefit from tax-free growth. However, George cautions, “clients should manage how much” they withdraw from investments “to keep income low.”
Di Pietro says that a high-income spouse may also choose to “lend the value of a portfolio” to a low-income spouse at a prescribed rate of interest. In this case, all investment gains and income on the port- folio would be taxed in the hands of the low-income spouse, he says.
This strategy makes sense for clients whose income will be affected over the long term. Di Pietro adds that the strategy works best if the portfolio’s value had declined at the time of the loan, as a deemed dispos- ition of the assets will be triggered at the time of the transfer. IE
    Make the most of a low-income year
  Keep clients on track for retirement despite financial hardship
with almost nine million can-
adians affected by job loss or pay cuts and more than 60% of small businesses experien- cing revenue decline of 20% or more during the Covid-19 pandemic, 2020 could be a low- income year for many of your clients.
As a financial advisor, you’re well placed to help clients overcome this chal- lenge, says Wilmot George, vice-president of tax, retirement and estate planning with CI Investments Inc. in Toronto.
When a client loses their job or experi- ences an unexpected drop in income, George says, your first priority is to help them avoid a cash-flow crunch by creating a plan for meeting their short-term liquid- ity needs. Ideally, your client won’t have to take on debt to finance those needs.
Once your client’s short-term needs are taken care of, you can help them take advantage of potential tax efficiencies that may result from making less than in a typ- ical year, George says.
Clients can use a number of tax-efficient strategies to increase cash flow, reduce taxes payable or get a bigger tax refund,
depending on the client’s circumstances. Blair Evans, director of tax and estate planning with IG Wealth Management in Winnipeg, says carefully reviewing each client’s situation is important when deter- mining whether they expect their decline in income will be temporary or extend
into future years.
For many clients, one of the most com-
mon tax-planning tools is an RRSP.
“If they have [already] contributed to an RRSP, it would make sense for them to defer their tax deduction in the cur- rent year to a year when their income is higher,” says Frank Di Pietro, assistant vice-president, tax and estate planning
with Mackenzie Investments in Toronto. Typically, tax deductions related to RRSP contributions can be carried for- ward indefinitely. “[Clients may] get a big- ger deduction if and when their income rises to pre-Covid levels [depending on their pre- and post-Covid tax bracket],” Di Pietro says. “The higher the tax bracket,
the greater the deduction.”
Clients who won’t make an RRSP con-
tribution because of a decline in income should think about the opportunity they are forgoing to get a head start on tax-free growth in their investments, George says.
Married clients or those in common-law relationships have more options if their spouse’s income is unaffected in 2020.
The Canadian tax system, George says, “looks at individual and not combined
Some clients can engage in tax-loss selling to free up additional cash flow

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