This article was produced in partnership with Desjardins Group.
Today, many people struggle with what seems like a simple question: “What do you want from your retirement income?”
Gone are the days when future retirees had a straightforward plan, often involving a predetermined retirement age, sometimes chosen by their employer. The shift from widely available defined benefit pension schemes to the less generous defined contribution pensions has significantly affected retirement planning. Additionally, changes in longevity, including an increase in life expectancy of over nine years for a 65-year-old from 1980 to 2024, have prompted a re-evaluation of retirement expectations and planning.
Millions of Canadians are concerned about the possibility of depleting their retirement savings[1]. Fortunately, there's a lesser-known tax-advantaged annuity designed to mitigate this fear by offering a guaranteed income during the latter part of one's life. This financial product can serve as a crucial safety net, ensuring financial stability and peace of mind in retirement.
Philippe-Olivier Dumas, Head of Product Development, Guaranteed Investment Funds and Annuities at Desjardins, acknowledges that figuring out the amount of income needed in retirement, along with choosing the most suitable annuity, can be daunting. Annuities present sophisticated solutions to intricate financial challenges. Dumas advises becoming well-versed in annuities and emphasizes the importance of concentrating on the outcomes an annuity can provide.
Desjardins is broadening its range of responsible annuity options by offering members and clients the opportunity to acquire an advanced life deferred annuity (ALDA) through a financial advisor. This move positions Desjardins as the pioneering financial institution in Canada to offer this product to investors. Specifically, Dumas highlights that by choosing an ALDA, investors gain the ability to delay their annuity payments, thereby focusing on reducing the longevity risk at older ages.
There is no lack of awareness in the significant disparities in retirement savings between genders. Women's retirement savings are on average 30 per cent lower than men's. Additionally, women must work approximately two years longer to accumulate the same amount in retirement savings. This situation is compounded by women's higher life expectancy, necessitating savings for an extended period. Women generally adopt a more secure investment profile, exhibiting lower risk tolerance compared to men. This cautious approach stems from a heightened concern for financial security, leading women to prioritize peace of mind in their investment choices. Consequently, women often have less time to engage in the day-to-day management of their investments[2]. Responsible annuities align closely with the financial needs of women, presenting a valuable opportunity for advisors.
You have the flexibility to select the timing of your first payment when it comes to annuities, allowing you to decide on the deferral period. Additionally, you have control over the amount you wish to invest. Dumas says, “Even though you can allocate your entire savings to annuities, an advisable strategy might be to allocate only a part.”
“For traditional annuities, one of the features you can opt for is indexation, which adjusts your payments to account for increases in the cost of living, ensuring your purchasing power is maintained over time. Another important option is reversibility, which allows you to designate your spouse as a beneficiary, providing them with financial security in your absence.”
“Moreover, you can customize the percentage of the annuity that will be transferred to your spouse upon your death.”
With the growing trend toward responsible investing, a notable observation is that women have a heightened interest in investments that consider Environmental, Social, and Governance (ESG) criteria.
Dumas says, “Our approach to integrating ESG factors into annuities is based on three fundamental pillars. It begins with the exclusion of issuers engaged in activities contrary to our ESG values, such as those involved in weapons manufacturing, tobacco and vaping production, nuclear energy, and the fossil fuel industry.
“Following this, we adopt a selection process that identifies and includes issuers who are leaders within their respective industries or themes based on their ESG performance. Lastly, we engage in dialogue with issuers, encouraging them to enhance their ESG practices. This comprehensive strategy ensures our annuities not only provide financial security but also reflect the growing demand for investments that are responsible and sustainable.”
A paradoxical outcome of diligently saving for retirement is facing larger tax bills during those retirement years. Tax deferral stands out as a significant advantage of annuities in retirement planning. Dumas points to the unique appeal in that the ALDA caters to those who do not require early withdrawals from their retirement accounts, allowing them to defer taxation beyond their 71st birthday. ALDAs enable retirees to allocate up to 25 percent of their RRSP or RRIF assets, with a cap of $170,000, into an annuity that postpones payments—and the taxes on those payments—until they reach 85 years of age. By earmarking these funds for the later stages of retirement, retirees can mitigate the risk of outliving their resources.
A prevalent misconception lies in the performance of annuities. There seems to be a lack of knowledge about how annuities work, specifically regarding how funds are managed once they are given to insurance companies and the nature of the returns. The returns on annuities are indeed dependent on the policyholder's longevity, which can make them seem opaque compared to more direct investment products.
Expanding on the management of these funds, it's important to note that at Desjardins, annuities are managed at an institutional level by investment professionals within the assets of the insurance company.
Dumas says, “This management approach allows us access to asset classes that aren't typically available to individual investors, providing a foundation for generating returns that can support competitive pricing and product offerings in the annuity space. This level of professional management is a crucial element that contributes to our ability to offer annuities with appealing terms.”
Annuities stand out as a secure financial product specifically designed to provide protection against the uncertainty of life expectancy, a critical aspect that becomes increasingly important as individuals plan for long-term financial security. This unique benefit, however, is often underappreciated until individuals face the reality of needing sustained income over an extended period.
Despite these perception challenges, Desjardins has witnessed remarkable success with annuities, especially in the last year, which was a record-breaking one.
“We doubled our previous record, marking an extraordinary year. While this success can partly be attributed to higher interest rates, I believe our position as the sole providers[3] of responsible annuities also played a significant role in attracting clients. This achievement is not only a testament to the product's appeal but also positioned us as the second-leading provider in the Canadian market[4].
“The momentum we've built from last year provides a strong foundation for our expectations in the annuities sector. It's encouraging to start the year with such positive energy, and we're hopeful that this momentum will continue throughout 2024. This initial enthusiasm sets a promising tone for the year,” Dumas concludes.
[1] https://www2.deloitte.com/ca/en/pages/press-releases/articles/deloitte-canada-report-shows-the-canadian-financial-services-ecosystem-must-work-together-to-narrow-the-retirement-gap.html
[2] https://hbr.org/2020/12/how-the-gender-balance-of-investment-teams-shapes-the-risks-they-take and https://www.sciencedirect.com/science/article/abs/pii/S0167268119301374
[3] Desjardins internal market watch. February 2024.
[4] LIMRA LOMA, Individual Annuities in Canada Quarterly Survey September 30 2023
