Q. My wife and I are retired and in our mid-60s. We are financially very comfortable. I also have a sizeable indexed defined benefit work pension. My wife has a large RRSP from self-employment. It is with Manulife (IncomePlus) and was intended to act as a variable rate annuity since she does not have a pension.
Manulife has offered her a very sizeable “enhancement deposit” to give up the guarantees and get out of the contract. The performance has been marginal because of the high MERs and administration fees. We are thinking about taking the offer and going into a lifetime annuity that guarantees, at a minimum, the return of initial lump sum payment (in case of early death). The annual annuity payments are substantially higher (almost 1/3 higher) than the minimum guaranteed in her current contract. It’s hard though, to give up complete control of some of our retirement funds although we have done it partially already. Any thoughts on what else to consider?
– Thanks, Abel
A. There’s a lot going on in your question, Abel, and lots to consider in providing an answer.
First, let’s review the basics of the retirement investment you’re asking about. As you point out, the product your wife purchased is a variable annuity with a lifetime income rider. These products are intended to provide guaranteed income in retirement, like an annuity or defined-benefit pension plan, but based on a portfolio that you still own and control.
The variable-annuity-plus-guaranteed-income-rider combo was developed as a “middle road” between the options, on one hand, of generating retirement income from a portfolio of stocks and bonds, and, on the other, using your saved funds to purchase an annuity at retirement to provide lifetime income. The stock-and-bond choice provides no lifetime income guarantee and leaves retirees exposed to the risks of changing (and falling) markets; while the annuity choice usually involves the irreversible handover of your assets to the life insurance company issuing the annuity (subject to various guarantees that can be added to the annuity). While there are many other considerations to take into account, such as timing and tax, that’s the 10,000-foot view.
With the rise in the number of people hitting retirement age in Canada in recent years, coupled with the decline in defined-benefit pensions, insurance companies like Manulife and others saw a need for a product that would provide “pension-like” income in retirement—and products like IncomePlus filled that need. Many Canadians purchased this and similar products in the wake of the global financial crisis when the risk of faltering markets was front and centre for future retirees.
The basic mechanics of IncomePlus and comparable products are that the purchaser—your wife, in this case—invests in Manulife segregated funds, which themselves are relatively expensive funds due to the guarantees they already offer beyond mutual funds, and then the income rider or guarantee is layered on at an additional cost. Then, starting at age 65, the IncomePlus contract pays a guaranteed five percent per year of the portfolio value for as long as you live, even if the value of the portfolio falls and even if you live a very long time, long enough to completely deplete the original portfolio. Risk-averse people who wanted some guaranteed lifetime income in retirement, and who were worried about remaining exposed to the volatility of stock and bond markets, were the natural purchasers of IncomePlus and like products.
That background brings us to today and your question. You’re now wondering whether it makes sense to keep the funds invested in the IncomePlus portfolio, with the five percent lifetime guarantee; or exit the contract, collect the “enhancement bonus,” and potentially buy a plain-vanilla income annuity to provide lifetime income for your wife in retirement. Although the income annuity would pay more in monthly income than the guaranteed income provided in the IncomePlus contract, that higher monthly amount is only available if you turn over the assets used to fund the annuity to the annuity issuer.
A very important concept here, Stay-or-Go, is that guarantees have a cost. If you want the certainty of income that lasts as long as your wife is alive, there is a cost. And if you want to retain control of your assets, rather than hand them over to an insurance company to provide lifetime income, there’s a cost to that, too. (Those costs are not always financial—they can include more intangible costs such as liquidity and risk exposure.)
As I see it, the fundamental question you need to answer is whether you value the benefits of your existing IncomePlus contract—such as the flexibility to exit the contract and the option to retain control of the invested funds—most, or whether you would prefer to maximize the retirement income available from your wife’s funds by using an income annuity, at the expense of the principal used to purchase the annuity. (A third choice would be to cash out the IncomePlus product and “take your chances” creating income from a portfolio of assets.)
In making your decision, there are two additional issues I think you may want to consider. The first is that if IncomePlus was appropriate for your wife when it was purchased, what—if anything—has changed in your situation that means unwinding the purchase is the right choice now? And secondly, keep in mind that buying annuities to create retirement income isn’t necessarily an all-or-nothing proposition: annuities can be purchased slowly, over time, with part of your saved nest egg to provide retirement income keyed to your changing circumstances (your age, preferences, needs, and wealth).
Hopefully, the initial purchase was made in the context of a larger retirement income financial plan for you and your wife. If yes, the answer to your question may be found by revisiting that plan. If your plan shows that you can tolerate exiting the contract and potentially purchasing an annuity to provide lifetime income, your wife may want to cash out. But if exiting puts your plan in jeopardy—such as if you are counting on the flexibility of the IncomePlus product to meet needs or cover risks in retirement—or just means you can’t sleep at night, staying the course may be best. Ultimately, the decision is based on your specific preferences and circumstances, in the context of your personal financial plan.
Alexandra Macqueen, with files from Jason Pereira of Woodgate Financial Inc. Alexandra is a Certified Financial Planner and retirement expert providing advice through Pension Acuity Partners.
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