As retirement approaches, many Canadians start thinking about how to secure their income in a way that provides stability and peace of mind. One of the smartest ways to do this is through a copycat annuity, especially if you’re leaving a defined benefit (DB) pension plan.
A copycat annuity allows you to transfer the value of your pension to a secure Canadian insurer. This guarantees lifetime income, with benefits identical to what you’d receive from your employer’s pension plan. But the big difference? Your pension is now safely in the hands of a financial institution, rather than being tied to the future health of your employer. Plus, there’s most often cash surplus.
What is a Copycat Annuity?
A copycat annuity is a life annuity designed to match the benefits of your DB pension plan but with the added security of being backed by a Canadian insurance company. This option appeals to retirees who want to avoid the risk of their pension being affected by the financial health of their former employer. Is your employer going to fail or leave Canada?
Here’s how it works:
- The commuted value of your DB pension is transferred to the insurer.
- You receive lifetime guaranteed income, identical to what you would have had with your original pension.
- The copycat annuity cannot be materially different from your DB plan, ensuring it closely mirrors the original benefits.
- Any spousal / partner benefits in the original pension are matched.
🔗 Related reading: The commuted value of your pension explained
Why Choose a Copycat Annuity?
If you’re worried about your employer’s pension plan becoming underfunded or insolvent, a copycat annuity offers a secure alternative. Here are a few reasons why many Canadians are making the switch:
- Risk Avoidance: You’re protected from the risk of a failing pension plan.
- Guaranteed Income for Life: Just like your DB pension, a copycat annuity provides lifetime income, ensuring your retirement is secure.
- Lump Sum Payouts: In some cases, if the cost to purchase your annuity is lower than the commuted value of your pension, you may also receive an excess lump sum payout.
- Survivor Benefits: Joint-life options ensure that your spouse / partner continues to receive income even after you’re gone.
For retirees with a defined contribution (DC) plan, a copycat annuity offers a way to eliminate the uncertainty tied to investment performance and market risk.
🔗 Related reading: Should you take your pension as a lump sum?
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Hypothetical Example: From DB Plan to Copycat Annuity
Imagine you’ve accumulated a commuted pension value of $720,000. Then, after transferring that to an insurance company, the cost to buy a life annuity is $700,000. You’d receive guaranteed income for life, the same as your pension, but you’d also get the $20,000 surplus as a lump sum, which could be transferred to your RRSP if you have room.
This extra cash payout is a key benefit of copycat annuities and could give your retirement a nice financial boost. We’ve issued copycat annuities with up to $70,000 cash surplus to the member. That amount was about 10% of the commuted value.
Types of Copycat Annuities
You have several options when setting up a copycat annuity:
- Life Annuity: Provides lifetime payments based on your lifespan.
- Joint Life Annuity: Guarantees payments for your lifetime and continues to pay your spouse or partner if you pass away.
- Term Certain Annuity: Pays income for a specified period, with payments guaranteed even if you pass away during that time.
These options let you tailor your annuity to fit your needs and ensure your loved ones are cared for after you’re gone.
Tax Treatment of Annuities in Canada
When you transfer your pension into a copycat annuity, the income you receive is taxed as regular income in the year it’s received, much like a withdrawal from an RRSP or RRIF. However, annuities also provide certain tax benefits:
- Pension Income Splitting: If you’re over 65, you can split up to 50% of the income from your annuity with your spouse to lower your overall tax burden.
- Pension Credit: You may be eligible for a federal pension credit up to $2,000.
For many retirees, these tax advantages make annuities a more attractive option than other forms of retirement income.
Why Copycat Annuities Are a Safe Choice
Choosing a copycat annuity isn’t just about guaranteed income. It’s about peace of mind. Since annuities are sold by insurance companies, they’re protected by Assuris, a non-profit organization that safeguards Canadian policyholders if their insurance company fails. This extra layer of protection ensures that your income stream is secure, even if your provider runs into financial trouble.
How to Get Started with a Copycat Annuity
If you’re ready to take control of your pension and move it into a safer environment, here’s how to get started:
- Assess Your Pension: Understand the commuted value and review your options with a financial advisor.
- Consult with an Expert: Book a meeting with a pension expert, such as Bruce Youngblud, to discuss if a copycat annuity is right for you.
- Choose Your Insurer: Pick a Canadian insurance company that offers the best terms for your needs.
- Transfer Your Pension: Once you’ve made your decision, initiate the transfer process and secure your lifetime income.
🔗 Related reading: Choosing the right retirement income strategy
Conclusion
A copycat annuity is an excellent option for Canadian retirees looking to secure their pension and avoid the risks associated with employer pension plans. It provides lifetime guaranteed income and, in many cases, can even offer an additional lump sum payout.
If you’re approaching retirement or recently left your employer, it’s worth considering this safe and reliable option for your pension. Speak with Bruce Youngblud, CFP, today to explore your options and make sure your retirement is as secure as possible.
