The past few years have not been very kind to investors, especially to those recently or soon to be retired. Just as investors dragged themselves out of the rubble of 2008, along came 2011. For those of us nearing retirement, there just isn’t enough time to be able to make up any losses so caution is the key word. For those who are already retired and are receiving our income in the form of RRIF payments a downturn in market could be disastrous. If you are looking for shelter from the roller coaster ride of volatility inherent in the market and maybe trying to find a “sure thing”, you may want to consider PensionBuilder from Manulife Financial.
An individual who invests in PensionBuilder will receive a guaranteed income for the rest of his or her life at a fixed rate of return (income benefit payout percentage). The payout percentage is set at the time of the income selection, from 3.75% at age 50 to 6.75% at age 80. If the income option is deferred for one or more years after deposit, the investor will receive a 5% bonus for each year deferred. This bonus is notional and increases the value against which the payout percentage is applied. For example, let’s assume that an individual makes a $100,000 deposit into PensionBuilder at age 65 but defers taking his or her income until age 71. With bonuses, at age 71, the total retirement fund for income purposes has grown to $125,000. At age 71, the income benefit payout percentage is 5.85% resulting in a guaranteed income for life of $7,312. If income had been taken at age 65 the income benefit payout percentage would have been 5.25%. The effect of waiting five years to take income has increased the payout percentage from 5.25% to 7.312% guaranteed for life.
If, however, the funds deposited were an RSP and were converted to a RRIF at age 71, the minimum income required by law to be withdrawn as a RRIF minimum may be higher than the benefit payout percentage of the Pension Builder. In this case, PensionBuilder guarantees that the payout will be the RRIF minimum or the benefit payout percentage whichever is the HIGHER. Income may also be structured as a joint life payout with a benefit payout percentage that is 50 basis points less than a single life payout.
At first glance, PensionBuilder may resemble a life annuity which also pays a guaranteed income for life. PensionBuilder, however, has features and contract provisions which differentiate it from an annuity. Some of these are as follows:
- An annuity is a single, closed transaction meaning that once contracted it cannot be undone or surrendered for value, whereas PensionBuilder can be surrendered for its market value at any time (a charge may apply):
- In an annuity, should the annuitant die after the expiration of the guaranteed period, there is no residue to the estate or beneficiaries. With PensionBuilder if market conditions are favourable a death benefit could result which could be significant;
- PensionBuilder allows for additional deposits to be made prior to the income period. In our previous example, the investor could make contributions for the first five years in addition to the $100,000 deposit, providing for even more lifetime guaranteed income when that option is taken.
For investments which are non-registered the income provided by PensionBuilder is very tax efficient. Most of the income received is considered to be a return of capital and compares most favourably to other non-registered investments such as bonds or guaranteed investment certificates.
All deposits made to PensionBuilder are invested in a “fund of funds” that Manulife has created for this purpose. The PensionBuilder fund is comprised of three of Manulife’s conservative investment funds. PensionBuilder is a segregated fund and, as such, may provide protection against creditor claims. Also, since a beneficiary is named there is no probate nor administrative costs at death, nor any Wills Variation legislation concerns.
For investors who have been concerned with market stability in the years leading up to their retirement, PensionBuilder from Manulife Financial may be as close to a sure thing as they are going to find.
If you are interested in reviewing your retirement planning, call me and we can discuss this and other investment opportunities in more detail.