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.
The selection of an
annuity involves many complex choices. The major alternatives are as follows:
- Single or Joint
- 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
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.
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.
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
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
- 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.
Pension Plan (CPP)
CPP Benefits effective
Benefit for 2003
|Basic Old Age
- A non-pensioner
- A pensioner
- An allowance
at 65 and over
(retire at 65)
If you require
additional information refer Income Security Programs on the HRDC
web site at:
Security Programs Internet Sites:
HRDC -Income Security
Canada Pension Plan
CPP Pension Plan Payment
Assignment of Retirement
Pension or Pension Sharing:
Maximum OAS Rates:
ISP Info Card: