If you plan on retiring or leaving your job soon and you have a defined-benefit pension with your employer, remember that you have 3 options to choose how you want to handle your pension money.
Most people think that their options are limited to:
- Commuting the pension (cashing it out in full as a lump sum), or
- Leaving it with their employer and have the employer pay them for the rest of their lives.
But there is a third option! It’s called a “copycat annuity“.
What is a copycat annuity?
A copycat annuity mirrors your employer’s pension plan, matching your company pension dollar for dollar.
When you ‘purchase’ a copycat annuity from a Canadian insurance company, it has to be identical to what your employers pension plan offers you. In fact, Revenue Canada only allows this option if it is an identical mirror.
So you get the SAME pension for life, except that instead of it being paid out by your employer for the rest of your life (which could be risky if your employer goes bankrupt), the insurance company is the one who pays you for the rest of your life.
All income from your employer pension or copycat is taxable income. There is no difference in taxation between these two options.
Furthermore, there is a chance that when you get a copycat annuity, the Canadian insurance company could provide you bonus ‘surplus cash’ ONTOP of what your company promised you for your pension! This is surplus money that your employer sends to the insurer, which isn’t needed in order to copycat.
This can be a pleasant surprise, where we’ve seen clients getting a cheque for $5,000… $10,000… even as high as $70,000 in surplus cash, simply for purchasing the copycat annuity.
Copycat annuity is NOT the same as taking the commuted value option.
Unlike when you take the commuted value (lump sum) and manage the money yourself, a copycat annuity will be paid out to you for life and is managed by the Canadian insurance company. This gives you peace of mind knowing that your money is professionally managed by a trusted, Canadian financial institution such as Canada Life or Sun Life.
Things To Know About Copycat Annuities:
- Just like your employer’s pension, a copycat annuity is a lifetime income that is guaranteed to be paid even after you pass away. If you die before receiving all of your income, a copycat annuity will continue to pay out the rest of your income to your spouse or another beneficiary.
- Copycat annuities are open to all members of defined-benefit pension schemes, including public sector workers, teachers, auto workers, and just about anyone else who has a defined-benefit pension through their employer.
- The interest rate on your annuity will be linked to the consumer price index (CPI) – which is the measure of inflation – and this will automatically increase each year. This means you can be sure you won’t fall behind on inflation.
- Copycat annuities put you in control. You can choose your own annuity provider. There are no restrictions on which provider you can choose. At Pension Solutions Canada we are an independent firm, not tied to a specific company. This means you’ll get completely honest, unbiased recommendations and a truly customized solution tailored to you. We work with all the major providers including Canada Life, Sun Life, and Desjardins with a focus on exceptional customer service.
- As mentioned earlier, there is a chance that you might receive a substantial lump sum of surplus cash.
- All the Canadian insurance companies that we work with at Pension Solutions Canada are financially solid and 100% Canadian. They manage a lotof money. For example, Sun Life has over CAD$1 trillion in assets under management operating in a number of countries. Your employer simply doesn’t have the same scale or assets under management as a financial institution.
- Canadian insurance companies such as Canada Life (formerly Great-West Life) and Sun Life Financial have been around for over a hundred years. Canada Life is approaching 130 years in business, and Sun Life have a history spanning back to 1865. These are Canadian institutions that aren’t going anywhere any time soon. They are not “amalgamating” back to a foreign head office in a different country, moving overseas, or going bankrupt like many companies are during these uncertain economic times (example: Sears Canada cut their pensions by 30%!).
- For the Canadian insurers that we work with, pensions and life insurance is their primary It’s what they do, and they do it really well. They don’t make cars or trucks or refrigerators, they manage finances. They have a proven and successful track record in Canada. You can sleep well at night knowing that your money is with a company that is financially stable with a widely diversified investment portfolio and diversified global operations.
- In the unlikely case that a Canadian insurance company were ever to go bankrupt, there are protections in place (such as Assuris) to help you which are far better than what you get if your employer goes bankrupt. When you leave your pension with your employer, it has some Federal protections, however, moving your pension to a Canadian insurer with a proven track record can help de-risk your retirement income and lower the chances of seeing a pension cut due to your employer going bankrupt.
Considering a copycat annuity when you retire? Chat with us first!
Now it’s time to take action! The team at Pension Solutions Canada specializes in helping individuals prepare for retirement and protect their assets. We can also help you with estate planning, address tax minimization, and answer all of your retirement and pension questions.
Get a free consultation to analyze and discuss your pension options. Our services are at no cost to you.