Want A Higher Income Late In Life? ALDAs May Help

Longer lifespans mean planning now for later-in-life cash flow. Traditionally, employer-sponsored pension plans provided a solid income base. Today, fewer than 40% of Canadians have one. While public sector pension coverage is over 90%, the number drops to around 23% of workers in the private sector. The latter tend to be Defined Contribution (DC) plans versus the more secure and valuable Defined Benefit (DB) plans. In 2023, nearly 14% of seniors 65+ had an after-tax income of less than half the national median; obviously, some folks face a cash shortage later in life when they have fewer options.

During the recent federal election, the Liberals proposed reducing by 25% the minimum amount retirees must withdraw annually from their Registered Retirement Income Funds (RRIFs) to address the problem of excessive drawdowns during adverse market conditions, and to help defer excess taxes. To date, the proposal is pending legislation.

Laying down a financial “carpet” is essential to addressing rising costs in our golden years. The average age when people need long-term care assistance is around 83. Moving to a well-equipped and comfy seniors’ residence in a major centre like Toronto or Vancouver, with a private room and advanced medical care services (at an additional cost) is around $17,000 per month. At the other end, publicly subsidized seniors’ rooms with two or more beds start around $2,085 per month (Ontario), but there are long waitlists.

For those who can, delaying receiving Canada Pension Plan/Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) benefits to age 70 will provide higher pension payouts of 42% and 36% higher, respectively, and these are indexed to the Consumer Price Index (CPI), over the recipient’s lifetime. In 2025, the maximum CPP pension, deferred to 70, is approximately $23,210, and the maximum OAS pension is around $12,000. Assuming no personal savings, an annual gross income of approximately $35,000 per person or $70,000 couple (assuming both receive the maximum), is far from lavish when you consider a mid-range private sector retirement residence can cost around $80,000 annually.

Advanced Life Deferred Annuities (ALDAs) are a potential defence against longevity risk. They pay as long as you (or the joint holder) is alive. They allow the recipient to delay receiving payments as late as the end of the year they turn 85. Funds to purchase an ALDA must come from a registered plan, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), and the maximum is 25% of the plan’s value to a lifetime dollar limit of $180,000 (2025). Currently, only Desjardins Insurance sells ALDAs.

While regular annuities have modest deferral periods of around 5 years and only up to age 71, ALDAs can be deferred up to 30 years, with the period fixed at the time of purchase. Fees are comparable to regular annuities and consist of administration and commission costs totalling around five per cent of the premium. However, because the payments are deferred, not immediate, the premium generates higher payouts than a regular annuity would. (For example, a 55-year-old purchasing a $180,000 ALDA in 2025 would receive anywhere from $90,000 to $110,000 annually at age 85.)

ALDAs are best viewed as part of a retirement income stack, along with government and employer pensions and personal savings. “ALDAs especially benefit people who don't have a pension plan, whether it's DB or DC. If they don't receive an annuity in their retirement so this ensures they have something set aside in their old age. It's an insurance policy against old age, basically,” says Martin Deschenes, Advisor, Product Development and Pricing, Guaranteed Investment Funds and Annuities, Desjardins.

“I think an ALDA would also be beneficial for people who have limited retirement savings. Knowing they have a guaranteed income at a later age means they can optimize their investments for potentially higher returns than sticking with low-return Guaranteed Investment Certificates (GICs) because they need the financial security,” adds Samuel Tetrault, Senior Advisor, Product Development and Pricing, Guaranteed Investment Funds and Annuities, Desjardins.

ALDAs also offer attractive tax benefits for high-net-worth individuals. For example, those with six-figure RRIFs would lower their RRIF balance and the amount of fully taxable income they must withdraw annually. This could mean a reduction in the OAS income-tested clawback and leave more money to compound on a tax-deferred basis in their RRIF.

Another potential advantage of owning an ALDA is that, in our later years, our interest in making investment decisions and/or our cognitive ability to do so competently may be limited. These products address this issue by providing regular and sustainable income without the need to manage it.

Inflation is a silent killer, slowly weakening our spending power. While CPP and OAS provide cost-of-living increases, many DC pension plans do not. Further, those retirees who have tilted their portfolios away from equities toward GICs or government bonds may welcome the extra cash infusion from an ALDA in their mid-80s. Like all annuities, there is a trade-off between having cash now and having more of it later.

Bottom Line

There is no one-size-fits-all retirement income product. “People should think of an annuity as an income, not an investment product,” says Deschenes. “This is an insurance product against old age.”  ALDAs are advantageous for retirees with large, registered savings portfolios because they defer taxes on a portion of RRIF withdrawals, and, potentially, reduce OAS clawbacks. They are good for anyone who has anxiety about outliving their RRIF balances or the effects of inflation on regular expenses later in life. Joint ALDAs continue to pay out premiums at 100% after the first annuitant dies. A beneficiary, or the estate receives a return of premium, minus any payments already made.

Do-It-Yourselfers could try Jim Otar’s spreadsheet, which can help decide if an ALDA would be beneficial. Otar is an engineer, author, educator, and retired certified financial planner. https://www.retirementoptimizer.com/orderALDA.html Those individuals who already have an advisor or financial planner can ask them to run Monte Carlo simulations on the costs and benefits of purchasing an ALDA.

Rita Silvan, CIM is a finance journalist specializing in women and investing. She is the former editor-in-chief of ELLE Canada and Golden Girl Finance. Rita produces content for leading financial institutions and wealth advisors and has appeared on BNN Bloomberg, CBC Newsworld, and other media outlets. She can be reached at rita@ellesworth.ca.