Wealth Strategies: New RRSP Strategy for Retirement Planning

It’s not often that we’re given a new strategy to add to our retirement planning toolkit. But the recent Federal budget introduced the option of an ALDA (Advanced Life Deferred Annuity). This is the largest shift in the Canadian retirement landscape in quite some time, so one should certainly be made aware of this new strategy which will become available in 2020.

Essentially, it allows you to use up to 25% of the value of your registered account i.e. RSP, RIF or defined contribution pension plan, to purchase an annuity that begins payments, at the latest, by the end of the year you turn 85. This would entail a lifetime maximum of $150,000 indexed to inflation and rounded to the nearest $10,000. Just to recap, an annuity is a future guaranteed income stream purchased in advance with a lump sum, normally from an insurance company. These payments can continue for the lifetime of the purchaser or can be based on the joint lives of the purchaser and their spouse/common law partner. Annuities were quite popular when interest rates were much higher, but less so of late; however, the introduction of the ALDA could change that.

The ALDA would essentially provide future insurance on a portion of your registered investment portfolio and hedge against longevity risk. Potential candidates would also include those without a defined benefit pension with guaranteed payments in retirement. Using an ALDA also creates a potential tax reduction/deferral strategy whereby the removal of funds from the registered retirement vehicle would reduce the minimum RIF payment required from age 72 up to 85, and potentially minimize the OAS claw back. This tax deferral opportunity could apply to those with a long life expectancy, a high tax rate in their 70’s, or those with other sources of retirement income such as corporate assets or rental income they can access in the meantime.

The use of an ALDA also essentially reduces the risk level for a retirement portfolio, which may or may not be appropriate depending on the individual investor’s portfolio, risk level etc. That said, it is certainly an additional strategy to consider and discuss with one’s wealth manager.