Federal budget introduces annuities deferred to age 85

The federal government is permitting annuities that would allow retirees to move some savings out of their registered retirement funds to an annuity deferred until age 85.

The tax rules generally require an annuity purchased with registered funds to begin after the annuitant turns 71.

The Liberal government is amending the rules to permit seniors to purchase an advanced life deferred annuity (ALDA) under certain registered plans—an annuity whose commencement can be deferred until age 85. The plan was introduced Tuesday in the federal budget.

Doug Carroll, head of tax, estate and financial planning at Meridian Credit Union, said the financial industry has for years asked to push back the age at which RRIFs have to be drawn down.

“This addresses that to a large extent,” he said. “It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.”

For clients who don’t need to take out RRIF minimums but are forced to, “this may provide an avenue for those people to keep more of that money remaining in a tax-sheltered place by making use of these ALDAs,” he said.

The ALDAs would reduce the amount retirees are forced to withdraw annually from a registered retirement income fund (RRIF) or other registered plan while preserving savings until later in retirement. The value of the ALDA would not be included in the minimum withdrawal calculation.

The ALDAs, which will apply beginning in the 2020 tax year, will be qualifying annuity purchases under an RRSP, RRIF, deferred profit sharing plan, pooled registered pension plan and defined contribution pension plan, the budget says.

Lifetime limits will be 25% of a specific amount of a qualifying plan, calculated as:

• the value of all property (other than most annuities, including ALDAs) held in the qualifying plan as at the end of the previous year; and
• any amounts from the qualifying plan used to purchase ALDAs in previous years.

If the value of an ALDA purchased in previous years exceeds the 25% limit for a particular year due a decline in qualifying plan assets, the retiree won’t be forced to surrender or dispose of the annuity, the budget says.

ALDAs will also have a lifetime limit of $150,000 from all qualifying plans, indexed to inflation for taxation years after 2020, rounded to the nearest $10,000.

To qualify as an ALDA, annuity contracts will need to satisfy the following requirements:

• provide annual or more frequent payments for the annuitant’s life (or for the joint lives of the annuitant and annuitant’s spouse or common-law partner) beginning at the end of the year the annuitant turns 85;
• when the annuitant under a joint-life contract dies prior to commencement, the annuity will provide payments to the surviving spouse or common-law partner no later than when the payments would have started for the annuitant;
• provide periodic payments that are equal, except: when adjusted annually to inflation or a fixed rate specified in the annuity contract not to exceed 2% per year; or reduced on the death of the annuitant or the annuitant’s spouse or common-law partner;
• following the death of the annuitant, any lump-sum death benefit to a beneficiary should not exceed the premium paid for the annuity less the sum of all payments received by the annuitant; or, in the case of a joint-life contract, the sum of all payments received by the annuitant and the annuitant’s spouse or common-law partner prior to death;
• permit a refund to the annuitant of any portion of the premium paid for the contract to the extent that the premium paid for the contract exceeded the annuitant’s ALDA limit; and
• provide no other payments, such as commutation or cash surrender payments, or payments under a guarantee period.

Tax treatment on death

For tax purposes, annuity payments to the surviving spouse or common-law partner will be included in their income, the budget says.

If the beneficiary of a lump-sum death benefit is a surviving spouse or common-law partner, or a financially dependent child or grandchild, the lump-sum death benefit will be included in the income of the beneficiary for tax purposes.

In the case of a financially dependent child or grandchild, all or a portion of that amount will be permitted to be transferred on a tax-deferred (or rollover) basis to the RRSP, RRIF or other qualifying vehicle of the beneficiary if the beneficiary was dependent on the deceased annuitant by reason of physical or mental infirmity, the budget says.

If the beneficiary of a lump-sum death benefit is neither the deceased annuitant’s surviving spouse or common-law partner nor a financially dependent child or grandchild of the deceased annuitant, the lump-sum death benefit paid to a beneficiary will be included in the income of the deceased annuitant for tax purposes in the year of death.

If ALDAs exceed limits, a tax of 1% per month will apply to the excess portion, unless demonstrated to have been paid as a reasonable error and the excess amount is returned to an RRSP, RRIF or other eligible vehicle by the end of the following year, the budget says.