Monday, June 28, 2010

CPI-Indexed Life Annuities

Update: Annuity payment rates for one insurer are at the end of this post.

The Canada Pension Plan (CPP) is essentially a CPI-indexed life annuity. Your CPP benefits are determined based on your contributions during your working life, and once payments start they rise with the consumer price index (CPI) each year. CPP payments may not be large, but their purchasing power remains constant for the rest of your life. This brings considerable peace of mind.

For people who have built their own savings over the years without the benefit of an employer defined-benefit pension plan, it’s natural to consider turning a large lump sum of savings into a CPP-like CPI-indexed life annuity. This would eliminate having to worry about investing and would eliminate concerns about outliving your money or losing ground to inflation.

I wouldn’t want to tie up all my savings in an annuity, but I can see the appeal of allocating a portion to an annuity so that the combination of CPP and annuity payments would guarantee a “necessities” level of income for the rest of my life.

The last time I wrote on this subject I couldn’t find a life annuity in Canada whose payments were indexed to inflation. However, in Jonathan Chevreau’s recent Financial Post article, he explains that “most Canadian insurance companies don't sell true inflation-indexed annuities”. The implication is that some insurance companies do sell inflation-indexed annuities.

I tried harder to find a seller in Canada and finally found Standard Life Canada’s annuity page. Among the many choices is a fully CPI-indexed life annuity. The next questions are

1. What does “fully indexed” mean? Is there some sort of cap on inflation adjustments?

2. What monthly payments can one get for a given lump sum?

Unfortunately, Standard Life Canada does not sell directly to the public. They only sell through licensed advisors. Are there any licensed advisors in the house willing to find out what “fully indexed” means and whether payment increases are capped? As for the payment levels, I think quotes for the following three situations would be instructive:

– 3 cases: Single life annuity (woman or man) or joint life annuity
– Age 71 (when RRSPs have to be rolled into RRIFs)
– $100,000 in an RRSP
– Fully CPI-indexed
– No guarantee period or other options

According to Chevreau’s article, advisors prefer to sell different products that generate higher fees, but perhaps we will get lucky and an advisor will dig up some useful information on these CPI-indexed annuities.

Update: I received the following quotes for a $100,000 lump sum from Standard Life (accurate on 2010 July 7):


71-year old male: $522 per month
71-year old female: $470 per month
71-year old couple: $468 per month (40% reduction on first death)
71-year old couple: $388 per month (no reduction on first death)

The time to break even on these payments is 16, 18, 18, and 21.5 years, respectively.  The CPI increase is exactly equal to the officially-reported CPI increase except that any CPI decrease would not lead to a decrease in payments, but would be used to offset future CPI increases.

8 comments:

  1. I'll bet you $1 that you will not get any statements "on the record" about this type of pay out vehicle.

    The answer might be that you need to buy into the Public Service or Ontario Teacher's pension fund (of course you have to become a Teacher or a Silly Servant, so there are drawbacks).

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  2. Back in 2009 I worked for a company that used Sun Life for group benefits. At the time, as a group member, I was able to sign into a Sun Life website and get an on-line quote for a fully indexed annuity. Perhaps someone out there has this capability.

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  3. @Big Cajun Man: You may be right, but I can still dream.

    @Blitzer68: Do you recall what full indexing meant at Sun Life? Was there any cap on the maximum indexing percentage?

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  4. I believe you could choose either a cap amount for the maximum index percentage or full cost of living adjustments with no maximum. But my recollection could be off - perhaps someone with access to the SUNLIFE group benefits site could confirm this.

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  5. I'd sure like to find out too. I guess that a lot of the "indexing" consists of the investor choosing a COLA increase like 2 or 3% depending on what they think inflation will be as the insurance companies do for insurance like long term care. Of course, that defeats the purpose for me - I'd want the automaticity and simplicity of something like CPP.

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  6. @Anonymous: I agree that fixed-size increases don't bring much comfort. To get protection against the possibility of high inflation the increases must be indexed to some inflation measure.

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  7. If you are skittish about stock market investing, you can potentially realize the benefits of stock market participation through this comparatively no-risk annuity. there is a small risk when the stock market loses money in that year you will not have a gain however you will not lose any principal or accumulation.

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  8. Brilliant post mate, keep up the good work. Thanks for sharing good post.

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