Inflation adjusted annuitys

6615 Views 8 Replies 5 Participants Last post by OhGreatGuru, Sep 27, 2009

AntiBrian

Discussion Starter · Sep 25, 2009

I assume they are available in Canada, as I see them mentioned around here.

Can you buy one within your TFSA to shelter it from taxation, or say GIS clawbacks.

Also can one combine such an instrument with other insurance policies. For example, they have policies that will pay if you need to get sent to an old age home, or general medical and dental plans, could you pay up front a lump sum to keep you covered for life. I don't see myself being married in my old age, and kids, not gonna happen, I'd hate to be paying for insurance, then hit 75 or 80, and miss a payment or 2 because I am starting to get dementia and then lose my coverage just as I am about to need it.

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leslie

· #2 · Sep 25, 2009

Warnings:

* A lot of brokers will try to sell you a product with a growing payment when you ask for an inflation protection product. Be clear that the problem with inflation is NOT the inflation that is expected - that is baked into all the prices. It is the UNKNOWN inflation that will differ from the expected. So those products are useless.

* The amount by which your payment will be reduced (from a normal annuity) is more than most people think the risk of unknown inflation is.

* You can address inflation by buying annuities in tranches over time and with different 'deferral period' (delays before payments start). This will average out the return you get, and will also serve to provide more income in later years.

Since the TFSA is limited to $5000/yr you would not have enough there to buy an annuity for many decades. These are not products you buy for $20,000.

Look up for yourself whether they are allowed. I would think not for practical reasons.

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FeeOnly.ca

· #3 · Sep 25, 2009

CPI Indexed Life Annuities are currently priced about even with a 3.2% Escalating - Life Annuity (an annuity that increases by 3.2% each year). That means the market is pricing in future inflation at 3.2% , precisely.

If the actual compounded annual change in the CPI proves to be higher than 3.2% you will be better off with the CPI indexed Annuity vs. the Escalating Life Annuity. Less than 3.2% you will be worse off.

If we get a bout of unexpectedly high inflation the CPI Indexed Life Annuity will track that change, precisely.

Also, IMO people should be very careful about unqualified advice they find in public forums.

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Rickson9

· #4 · Sep 25, 2009

Currently we are experiencing deflation.

Whether you think inflation will come or not is not really relelvant. If you think it is relevant, I'll find a coin to flip to base my financial decisions since the outcome is likely to be similar.

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OhGreatGuru

· #5 · Sep 25, 2009

Presumably with time you could accumulate more than $20K in a TFSA. But an annuity in the sense that you mean cannot be purchased inside of a TFSA, anymore than you could purchase it inside an RRSP.

Just to confuse you, there is a product called Accumulation annuities (AA) that are a kind of guaranteed investment only offered through the insurance industry. They are very similar to GICs, but because they are offered by a life insurance company they have different guarantees. These are permitted inside an RRSP. But I don't this is the ype of annuity you were talking about.

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AntiBrian

Discussion Starter · #6 · Sep 26, 2009

I am asking more for 20 years down the road rather than now, and yes I know the products available can be very different in that time period. Just getting an idea of what is on the go today.

Pity about not being able to buy it within the TFSA, assuming the GIS still has the 50% clawback at the first dollar in the future, an annuity outside of a TFSA would really hurt.

As for deflation, please. The history is clear, with one exception, to be worried about inflation over the next 20 years or so would be a better bet. Even more so as, if there is a 2% deflation and your income goes down by 2%, not so much a problem. If your income grows by 3% fixed as some annuities allow and prices go up further for multiple years, then it is peanut butter and jelly time, only without the cute dancing banana. Such security would be worth a premium if you are retired in my opinion. Granted it would be even better to get it from the government rather than an insurance company, but what can you do.

The idea of not being able to pre pay insurance products ahead of time is worrisome. I'd be concerned over doing something rash like forgetting to pay a premium or ditching the plan all together due to senility, Alzheimers has a pretty high prevalence rate over the age of 75, never mind the other dementia. Without family to watch over you...

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OhGreatGuru

· #7 · Sep 26, 2009

AntiBrian said:
Pity about not being able to buy it within the TFSA, assuming the GIS still has the 50% clawback at the first dollar in the future, an annuity outside of a TFSA would really hurt.

..

Where do you get 50% from? The clawback rate is 15% on every dollar of income above a certain threshold income (currently about $64K), and the threshold keeps moving up with inflation.

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AntiBrian

Discussion Starter · #8 · Sep 27, 2009 (Edited)

OhGreatGuru said:
Where do you get 50% from? The clawback rate is 15% on every dollar of income above a certain threshold income (currently about $64K), and the threshold keeps moving up with inflation.

GIS claws back from the first dollar at 50%, you are probably thinking of the OAS.

http://en.wikipedia.org/wiki/Guaranteed_Income_Supplement

http://www.servicecanada.gc.ca/eng/sc/oas/gis/guaranteeddincomesupplement.shtml

A single person gets $516.96 from OAS and $652.51 from GIS however at the 50% clawback you get nothing with an income of $15,672
You also get 1000$ from GAINS if you are in Ontario, which is fully clawbacked at 2K a year of income also at 50%.

So with no other income, you get a total of 1169.47 a month plus about 83 or 84 a month from gains. Add in the property tax rebate, GST, and HST. However GAINS isn't inflation adjusted, as of the last budget everything else is IIRC.
http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml for payout rates

So in theory if you have 2K of CPP a year, you lose the full 1K of GAINS and 1K of GIS and end up no further ahead. IIRC Newfoundland has a 700+ dollar a year similar deal but the clawback starts at a much higher level and at a much lower rate. I can't speak for anywhere else.

This is why the TFSA is so good for some people, withdrawals will not effect your GIS nor your GAINS. Without it, those who have saved enough to provide a bit of income, but not enough to break out of the GIS clawback range with authority get hammered with an effective 50% taxation rate. In so far that for every dollar you make, you lose 50 cents of benifits.

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OhGreatGuru

· #9 · Sep 27, 2009

AntiBrian said:
GIS claws back from the first dollar at 50%, you are probably thinking of the OAS.

Right you are. I know the difference between the two. Some days it doesn't pay to get out of bed. My only excuse is that it didn't occur to me that a person making plans for their retirement 20 years or more down the road would be worried about the GIS clawback, because I didn't think they would be counting on being eligible for it in the first place. People who write to this forum for advice on how to invest their money are not usually planning for a retirement income below the poverty line.

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