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  The Companion Advisor: Retirement Planning
LIFs, RRIFs, and other IF's
Which retirement option is best for you?

Now that LRIFs are available as another retirement investment product, (in addition to RRSPs, RRIFs, LIRAs, LRSPs, LIFs and DPSPs) there may be some confusion about just which one is best for you. Here are some reminders to follow:

Your investment choices. You don't have to put all your retirement savings into one retirement product. For example, you can invest in a life annuity with the remainder being used to purchase a LIF or an LRIF. Keep in mind that if you purchase a LIF or an LRIF you are not committed to that decision forever. You can purchase a life annuity at any time with these funds. Remember to speak to your professional financial advisor.

Your goals. In general, if providing income for yourself and your spouse during retirement is your goal, a life annuity may best meet this objective. If leaving an estate for your heirs is your primary objective, then an LRIF is the option to choose. If your objective is a combination of both, then an annuity and a LIF or an LRIF may be the answer. If you're thinking about your estate, keep in mind that the lump sum payments made from an LRIF or a LIF on your death are taxable, unlike the payment of a death benefit from an insurance policy. Remember to speak to your professional financial advisor.

Risk tolerance. If you purchase a life annuity, some of the investment risk is transferred to the issuer of the annuity, since you are guaranteed a fixed income for life. On the other hand, if you purchase a LIF or LRIF, you bear the risk associated with declining markets. Remember to speak to your professional financial advisor.

Investment risk. It can't be said that there's no investment risk associated with life annuities. With an annuity you bear the risk that the market value of your pension assets or the interest rate on which the annuity depends is abnormally low on the date the annuity is purchased. You have no opportunities to take advantage of any future improvements in either. On the other hand, taking on investment risk may allow you to protect the purchasing power of your retirement income. The value of a fixed life annuity payment will erode with inflation. Be wary that it's been shown that equities over the long term provide the best hedge against inflation. LIFs or LRIFs allow you to invest in equities. Remember to speak to your professional financial advisor.

Retirement income volatility. If you invest in a LIF your maximum payments are essentially based on a formula involving present values using an interest rate equal to current bond rates, which can be no less than 6%. If you invest in an LRIF, your retirement income depends on the amount of income earned in the plan each year. If the investments don't earn much, your withdrawal could be reduced. Depending on the earnings, your maximum withdrawal under an LRIF may be less than it would be under a LIF. Keep in mind that your withdrawals can never be nil (except in the first year), due to the minimum amount under the Income Tax Act. Remember to speak to your professional financial advisor.

Permanent or temporary retirement. If your retirement is temporary, a LIF or LRIF may be best suited for you since it allows you to "un-retire" by transferring money back into a LIRA. In order to make the transfer you must be young enough to hold money inside an RRSP, which means you cannot be over the age of 69. Remember to speak to your professional financial advisor.

Life expectancy. With an LRIF your income is likely to decline with age. With a life annuity, the same amount will be paid to you for as long as you live. Canadians are living longer. In 1941, a 65-year-old Canadian female could expect to live another 13.6 years. More recently, life expectancy for a 65-year-old female was closer to 20 years.

Annuity interest rates. If you believe annuity rates are low when you retire, you may want to put off purchasing an annuity until rates are higher. A LIF or an LRIF allows you to delay the purchase of an annuity while still receiving retirement income.

Investment challenges of a LIF or LRIF. A LIF or an LRIF pose greater investment challenges than a LIRA or RRSP. The minimum annual withdrawal requirement means you'll have to maintain a portion of your plan in liquid assets. The withdrawals also mean you'll have to regularly review and perhaps buy and sell securities to maintain your asset mix objectives. Remember to speak to your professional financial advisor.

The Benefits of Holding a LIF or LRIF versus an Annuity

  LIF/LRIFs Annuity
Control Maintain full control Surrender control
Flexibility Decide how much you wish to
withdraw on yearly basis
Fixed sum on a regular basis for a specified
period of time. (subject to min/max)
Rewards The entire return on the investment
belongs to the plan holder
Funds may earn a return above
the amounts received as income
Transfer Ability to transfer from one institution
to another - change content
Locked in for period of contract.

Spousal Waivers/Spousal Consent (LIF/LRIF/PRIF)

Note: The terms "spouse" and "common-law partner" are defined differently in the legislation for different jurisdictions. Some jurisdictions have made provisions to provide spousal benefits to same-sex partners.

Pension plan legislation is structured to provide the plan member's spouse with a minimum pension income from the pension proceeds should the plan holder die. With the introduction of LIFs, LRIFs (and prescribed RRIFs in Saskatchewan), the level of pension income or survivor benefit can be considerably reduced due to the flexibility of withdrawals and investment risk. To protect a spouse's survivor benefits, the written consent of the spouse is required (except for Quebec and Federal plans) when an annuitant purchases a LIF, LRIF or prescribed RRIF. It is also often required if funds are being unlocked because of special circumstances (eg., shortened life expectancy). The terms "spousal waiver" and "spousal consent" may have different meanings under different governing legislations. The spousal waiver or consent form not only protects the rights of the surviving spouse, it also confirms that the spouse has knowledge of any disposition of pension funds.

Planning so you can Buy. Hold. And Prosper.™ in a way that's best for your particular needs requires a carefully prepared financial plan created jointly by you and your professional financial advisor. Make sure your plan is the best for your particular needs, contact your professional financial advisor.

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