ANNUITY, RRIF, LIF, CPP

Annuity

An annuity is a contract that provides periodic payments to the purchaser for life or for a specified period of time. The financial institution selling the contract reinvests the funds and provides the purchaser with periodic payments. These are normally paid monthly, but can be quarterly, annually, or at whatever intervals are agreed upon by the purchaser and issuer.
Each payment consists of an interest portion and a principal portion, the latter being a return of part of the funds used to purchase the annuity. This is very similar to the mortgage on a house that combines interest and principal payments over a long amortization period.
All payments received from annuities purchased with registered money from an RRSP are fully taxable. No tax is paid when you purchase annuity.

Annuity Choices

The selection of an annuity involves many complex choices. The major alternatives are as follows:

  • Single or Joint Annuity
  • Life or Term Certain Annuity to age 90
  • No Guarantee Period / Guaranteed Period 5-, 10-, 15 years
  • Annuity increased by 4% to offset inflation
  • Joint Annuity which decreases when one spouse passes away
  • Increased annuity payment if in bad health

The RRIF Opportunity

A Registered Retirement Income Fund (RRIF) is a contract that provides periodic payments from the commencement date until death or until the funds are depleted. Historically, RRIFs were fixed on a formula basis that provided very little flexibility. Recently, the government has provided a great many new options.
All RRIFs are created by the transfer of assets from RRSPs or other RRIFs and a person can own more than one RRIF.

The LIF Opportunity

If you understand a RRIF you're more than half-way to understanding a Life Income Fund (LIF). In fact, think of a RRIF with not only a minimum, but also a maximum annual payout that cannot be cashed in, and you've just defined a LIF.
If you left your company two years ago, and your pension funds were vested, one of the options for your pension was to transfer it into a Locked-In RRSP or Locked-In Retirement Account (LIRA). Locked-In means that you would not have been able to withdraw the benefits until retirement; and legislation stated that you would be guided by the rules of your previous employer's pension plan. Even when you did retire you had only one option - to purchase an annuity. Sure, that annuity guaranteed you an income for life, but it also guaranteed the same rate of interest for life. If rates went up or down, as in the last two years, you could not renegotiate to take advantage of those higher or lower rates.

General Guidelines for LIFs

  • LIFs are regulated by provincial and federal governments and are usually purchased between age 55 and 71 using assets from:
    • Locked-in RRSP
    • Locked-In Retirement Account (LIRA)
    • Registered Pension Plan (RPP) (* must be transferred to a Locked-In RRSP first although, some RPPs have received approval to transfer directly to a LIF)
    • Deferred Profit Sharing Plan (DPSP)
  • Minimum and maximum annual payouts are calculated based on the net asset value of the LIF at December 31st each year. No payout is required in the year the LIF is established.
  • If a payout is required for the year the LIF is set up, the maximum payout will be determined on a proportionate basis to the time the LIF was established.

Canada Pension Plan (CPP)

CPP Benefits effective January 2003:

Benefit Type
Maximum Benefit for 2003
Basic Old Age Security
$ 453.36

Guaranteed Income Supplement

  • Single
  • Spouse/Common-Law partner of:
    • A non-pensioner
    • A pensioner
    • An allowance recipient


$ 538.80

$ 538.80
$ 350.95
$ 350.95

The Allowance

  • Regular
  • Survivor

$ 804.31
$ 887.98
Retirement Pension at 65
$ 801.25
Disability Pension
$ 971.26
Death Benefit
$ 2,500.00
Survivor Pension at 65
$ 444.96
Survivor Pension at 65 and over
$ 480.75

Combined Pensions:

  • Survivor/Retirement (retire at 65)
  • Survivor Disability

$ 801.25
$ 971.26
Disabled Contributor's child benefits
$ 186.71
Deceased Contributor's child benefits
$ 186.71

Flat rate:

  • Survivor's Pension
  • Disability Pension

$ 144.49
$ 370.32

If you require additional information refer Income Security Programs on the HRDC web site at:
www.hrdc-drhc.gc.ca/isp

E&OE

Income Security Programs Internet Sites:

HRDC -Income Security Programs:
http://www.hrdc-drhc.gc.ca/isp

Canada Pension Plan Benefit Rates:
http://www.hrdc-drhc.gc.ca/isp/studies/trends/cpprates_e.shtml

CPP Pension Plan Payment Rates:
http://www.hrdc-drhc.gc.ca/isp/cpp/rates_e.shtml

Assignment of Retirement Pension or Pension Sharing:
http://www.hrdc-drhc.gc.ca/isp/cpp/rtsharing_e.shtml

Disability Vocational Rehabilitation Program:
http://www.hrdc-drhc.gc.ca/isp/cpp/vocational_e.shtml

Maximum OAS Rates:
http://www.hrdc-drhc.gc.ca/isp/oas/rates_1e.shtml

ISP Info Card:
http://www.hrdc-drhc.gc.ca/isp/studies/trends/infocard_e.shtml