Impending changes to the industry’s actuarial tables have cast annuities in a new light and advisors are moving clients into them before the taxman cometh
Thanks to changes in the mortality tables that take effect January 1, 2017, annuities will become less tax efficient, creating a call to action for advisors and their clients.
Those tables will see life expectancy for the average Canadian male increase by eight years from 72 to 80.
“Canadians are living longer,” BC annuities specialist John Beaton told LHP. “The new mortality calculations will translate into lower income from the same amount of purchase price for the same annuities.”
Perhaps even more significant are the tax-related changes that will occur as a result of the mortality tables being updated from the 1971 Individual Annuity Mortality Table to the Annuity 2000 Basic Mortality Table. While the gross amount of a client’s annuity payment won’t change, what they receive after-tax will.
For example, if you have a 60-year-old male client who purchases an annuity, the total interest earned over the life of the contract (12 years based on male life expectancy of 72) is spread over those 12 years as is the tax payable. With the change to 80, the tax gets spread out over a longer period of time but the amount of income received by the client increases by eight years and as a result, so too does the amount of tax payable.
“For instance, right now, a 75-year-old male can purchase a non-registered life annuity and expect to receive his income completely tax free,” Beaton told LHP. “After the change there will always be a taxable portion for new non-registered annuity purchases. For some non-registered life annuities, the taxable portion will increase as much as 60%.”
Why buy between now and December 31, 2016?
Grandfathering provisions give advisors 13 months to get their clients into annuities under the old tables where they can enjoy greater tax savings that will be lost come 2017.
“Prescribed annuities purchased on or after Jan. 1, 2017 will use the new mortality table to calculate the taxable portion, but annuities purchased before Jan. 1, 2017 will use the old mortality tables, even if annuity payments won’t begin until after Jan. 1, 2017,” Sun Life wrote in an information document for advisors. “The key requirement is that the annuity rates for a client’s annuity be ‘fixed and determined’ before Jan. 1, 2017.”
Those tables will see life expectancy for the average Canadian male increase by eight years from 72 to 80.
“Canadians are living longer,” BC annuities specialist John Beaton told LHP. “The new mortality calculations will translate into lower income from the same amount of purchase price for the same annuities.”
Perhaps even more significant are the tax-related changes that will occur as a result of the mortality tables being updated from the 1971 Individual Annuity Mortality Table to the Annuity 2000 Basic Mortality Table. While the gross amount of a client’s annuity payment won’t change, what they receive after-tax will.
For example, if you have a 60-year-old male client who purchases an annuity, the total interest earned over the life of the contract (12 years based on male life expectancy of 72) is spread over those 12 years as is the tax payable. With the change to 80, the tax gets spread out over a longer period of time but the amount of income received by the client increases by eight years and as a result, so too does the amount of tax payable.
“For instance, right now, a 75-year-old male can purchase a non-registered life annuity and expect to receive his income completely tax free,” Beaton told LHP. “After the change there will always be a taxable portion for new non-registered annuity purchases. For some non-registered life annuities, the taxable portion will increase as much as 60%.”
Why buy between now and December 31, 2016?
Grandfathering provisions give advisors 13 months to get their clients into annuities under the old tables where they can enjoy greater tax savings that will be lost come 2017.
“Prescribed annuities purchased on or after Jan. 1, 2017 will use the new mortality table to calculate the taxable portion, but annuities purchased before Jan. 1, 2017 will use the old mortality tables, even if annuity payments won’t begin until after Jan. 1, 2017,” Sun Life wrote in an information document for advisors. “The key requirement is that the annuity rates for a client’s annuity be ‘fixed and determined’ before Jan. 1, 2017.”
