# Annuity Expert: Any questions I can help with?



## IvonHughes (May 28, 2013)

Hello everyone,

My name is Ivon Hughes, I've noticed a few referrals from this forum to my site. If you would like to discuss retirement planning or annuities in particular I'd love to contribute to the discussion. 

About me: I'm a Canadian insurance broker with over 30 years experience who specializes in life annuities.

Thank you. 

Ivon


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## andrewf (Mar 1, 2010)

Great!

One question you might be able to address is where annuities fall in terms of default risk on the spectrum from CDIC insured GICs to equity market risk.


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## IvonHughes (May 28, 2013)

Hi, 
If you are a Canadian citizen or resident, and you purchase an annuity from a member life insurance company in Canada, you are protected by Assuris formerly known as CompCorp www.assuris.ca. If your life insurance company fails, your payout annuity policy will be transferred to a solvent company. Your income is 100% protected up to $2000 per month income with each insurance company. If your income exceeds $2000 per month, the protection is limited to 85%.

Current members of Assuris are: http://ow.ly/peTcQ 

Ivon


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## james4beach (Nov 15, 2012)

Hi Ivon

One thing I haven't seen addressed much is the counterparty risk with annuities.

As I understand it, the annuity is an obligation from the insurance company so there is heavily concentrated counterparty risk. Because AIG and large European insurance companies collapsed recently, I'm not keen on putting faith in an insurance company to make good on payments for 20+ years... I sure as heck wouldn't buy a 30 year insurance company bond, for example.

Someone mentioned that all annuities in Canada are backed by Assuris (not sure if this is true). As I understand it, there is no government backing. I see only $115 million in the Assuris safety fund so this alone doesn't impress me much.

Even in their own examples, from the annual report, the liquidation of Les Coopérants in 1993 cost Assuris a total of $180 million.

So if the "annuity insurance" is only good for $115 million, and even a recent insolvency cost them $180 million, I don't see why I should have too much faith in the safety of annuities. I'm starting to think that the amazing "yield" offered by annuity contracts is really an indication of the counterparty risk they come with. I'm also starting to think that analysts and salespeople are underplaying the risk of loss.

Perhaps you can convince me, but at the moment I wouldn't be comfortable putting hundreds of thousands of dollars into such a contract unless I see more safety and guarantees behind it. Even with the existing insurance, I don't see how Assuris can make good on the promises to repay in the case of any decent sized insurance company failure.


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## james4beach (Nov 15, 2012)

Sorry I didn't see Ivon's reply above this one before I posted my question.

My concerns remain though that Assuris doesn't have sufficient resources to offer this kind of guarantee. And what you describe about transferring existing policies to another company assumes that other companies are willing to buy those contracts, which isn't a guarantee, especially in the kind of environment where insurance companies start collapsing.


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## AltaRed (Jun 8, 2009)

I am of the same mind but one way around this is to annuitize only a portion of the portfolio. Perhaps $1500 annuity income from 2 different insurance companies. Perhaps just enough to keep the lights on and food on the table. Diversification is an essential part of any portfolio.


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## pwm (Jan 19, 2012)

Welcome to the forum Ivon. I have a question for you. 

My wife and I each have an RRSP account. She is the owner of her RRSP although I contributed the money. (It's a spousal RRSP). Can we combine funds from each account to buy one joint annuity, or do each of us have to purchase a separate annuity from the funds in our individual RRSP? 

Thanks in advance.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... My concerns remain though that Assuris doesn't have sufficient resources to offer this kind of guarantee.
> 
> And what you describe about transferring existing policies to another company assumes that other companies are willing to buy those contracts, which isn't a guarantee, especially in the kind of environment where insurance companies start collapsing.


IMO - a lot depends on how many are failing and what the health of the rest are.

For example, several life insurance companies chose to not bail out Confederation Life on the rationale that they could put money into bailing out and then end up having to put more money into the Assuris fund to cover any short falls, should it still fail despite the bailout. 

Once Confederation Life collapsed - they were eagerly trying to buy the Confederation Life contracts.
If I recall correctly - in some cases, a larger insurer bought a block of business and had per-arranged to re-sell to two or three other insurers the parts that didn't fit efficiently.


So from what I've observed - companies wanting to buy the contracts is less of an issue than the possibility of a sector wide collapse that results not enough cash to cover Assuris, let alone buy out collapsed company assets.


The most recent seems to be 2012 (Union of Canada Life Insurance), then a long break back to the 1990's (Les Coopérants, Sovereign Life, and Confederation Life). 
http://www.theglobeandmail.com/glob...windup-of-union-of-canada-life/article546284/


Though I can't help wondering if some of the buyouts listed in this link were because the writing was on the wall.
http://www.yourinsurancebrokers.com/mergers.html


Cheers


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## Beaver101 (Nov 14, 2011)

Question - can I buy an indexed annuity these days, in Canada that is? If so, can you please direct to the source of the product.

(I admit I have not researched this, hence, the question.) :unconscious:


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## IvonHughes (May 28, 2013)

james4beach said:


> Sorry I didn't see Ivon's reply above this one before I posted my question.
> 
> My concerns remain though that Assuris doesn't have sufficient resources to offer this kind of guarantee. And what you describe about transferring existing policies to another company assumes that other companies are willing to buy those contracts, which isn't a guarantee, especially in the kind of environment where insurance companies start collapsing.


This question and comment is outside the sphere of my ability to answer. Assuris.com and any large insurer would be the best entities to answer this concern.

Ivon


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## IvonHughes (May 28, 2013)

AltaRed said:


> I am of the same mind but one way around this is to annuitize only a portion of the portfolio. Perhaps $1500 annuity income from 2 different insurance companies. Perhaps just enough to keep the lights on and food on the table. Diversification is an essential part of any portfolio.


Yes,this is a good approach, especially if you have the ability to manage the balance not used for the annuity.

As you leave the savings cycle of your life and start to need income on your retirement,views of guarantees change. In other words what you plan at age 60, may not be the path you take later on. Guarantees are extremely important to those who have been caught in market downsurges and want certainity in life.

Ivon


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## IvonHughes (May 28, 2013)

pwm said:


> Welcome to the forum Ivon. I have a question for you.
> 
> My wife and I each have an RRSP account. She is the owner of her RRSP although I contributed the money. (It's a spousal RRSP). Can we combine funds from each account to buy one joint annuity, or do each of us have to purchase a separate annuity from the funds in our individual RRSP?
> 
> Thanks in advance.



Thank you for the warm welcome.

You cannot combine the RRSP's of 2 policyholders; you would each need to buy separately, perhaps commencing incomes at different times if so desired.

Ivon


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## IvonHughes (May 28, 2013)

Beaver101 said:


> Question - can I buy an indexed annuity these days, in Canada that is? If so, can you please direct to the source of the product.
> 
> (I admit I have not researched this, hence, the question.) :unconscious:


Yes,you can buy an annuity, indexed, for example, at 2% a year. The problem is that it will take roughly 10-12 years to commence receiving the income you would otherwise received. It is only from this time that your payment would increase. For obvious reasons, this answer ignores inflation/deflation, tax rates, continued good health etc.

My advice to you is to compare both and then decide. But what I counsel my clients to do is to set aside 5% of each payment.

Here is the product info you requested. It compares an indexed annuity vs standard life annuity. http://www.lifeannuities.com/index-annuity.html

Ivon


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## My Own Advisor (Sep 24, 2012)

How is Assuris funded?

If Assuris is the "not for profit organization that protects Canadian policyholders if their life insurance company should fail."...where does the pool of money come from when companies crash to protect annuity beneficaries? Federal transfer payments via taxation? Membership companies? My understanding is every lifeco who wants to sell insurance policies in Canada (and annuities) is required to become a member of Assuris. 

Thanks Ivon.
Mark


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## Beaver101 (Nov 14, 2011)

Thanks Ivon. Will review when get the chance.


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## IvonHughes (May 28, 2013)

My Own Advisor said:


> How is Assuris funded?
> 
> If Assuris is the "not for profit organization that protects Canadian policyholders if their life insurance company should fail."...where does the pool of money come from when companies crash to protect annuity beneficaries? Federal transfer payments via taxation? Membership companies? My understanding is every lifeco who wants to sell insurance policies in Canada (and annuities) is required to become a member of Assuris.
> 
> ...


Yes, each lifeco has to be a member according to the Assuris site. "Assuris maintains a current Liquidity Fund of at least $100 million. This provides immediate cash to meet Assuris' obligations in any future insolvency before assessing Members."

Ivon


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## olivaw (Nov 21, 2010)

Hello Ivan 

Welcome to the forum. 

Is it possible to buy a term annuity that is indexed to inflation? My terminology might be wrong but I am 55. I'd like to invest into some form of annuity that would pay me abut $500/month to tide me over until OAS kicks in at age 65. At the end of the term, I would like to get my money back and use it to help out my kids. How much would such a thing cost? Is it going to be cheaper than GICs? 


Thank you


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## james4beach (Nov 15, 2012)

IvonHughes said:


> This question and comment is outside the sphere of my ability to answer. Assuris.com and any large insurer would be the best entities to answer this concern.


Thanks Ivon, I will try asking them directly too.

It's a concern of mine because I can't imagine buying such a large contract from a company without rock solid faith that the company can make good on its promises to me.


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## lonewolf (Jun 12, 2012)

Hj,IvanHughs my name is Lonewolf welcome to the forum

Are there any independent rating agencies that are not paid by the insurance companies that rate the stability of the insurance company perfurably that don't cost anything to get the rating. It would be best if the rating agency was not from Canada but maybe from the U,S do to the fact more numbers to work with in how good they are @ predicting the likelihood of a financial institution going under


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## IvonHughes (May 28, 2013)

olivaw said:


> Hello Ivan
> 
> Welcome to the forum.
> 
> ...


Yes, you can have a term certain annuity indexed to inflation. The funds you pay for the $500 a month income are used up at the end of the period i.e.age 65. If you want the payments to continue,then you need a joint life annuity with your child or children.That is another matter entirely.


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## IvonHughes (May 28, 2013)

lonewolf said:


> Hj,IvanHughs my name is Lonewolf welcome to the forum
> 
> Are there any independent rating agencies that are not paid by the insurance companies that rate the stability of the insurance company perfurably that don't cost anything to get the rating. It would be best if the rating agency was not from Canada but maybe from the U,S do to the fact more numbers to work with in how good they are @ predicting the likelihood of a financial institution going under


I am not aware of an independent agency.The 2008 drama in the markets showed that a lot of banks and rating agencies seemed to be in bed together. So it becomes a question of " independent " of what.


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## james4beach (Nov 15, 2012)

And perhaps this helps explain that "mystery" people allude to of why there is such low usage of annuity products.

Simply: people can't trust the financial institutions. I don't either. Few people are willing to hand over 200K, 300K etc in one chunk to a financial company in exchange for a promise of payouts for decades into the future. Although I realize it's not the same thing, it sure sounds a lot like those 'structured products' that AIG, Lehman Brothers, and the other Wall Street firms were selling to people before they blew up and wiped out retirees.

Personally I wouldn't be comfortable with an annuity contract, until I see much more solid guarantees than Assuris's tiny pool of money backing all annuities.

Financial firms like MF Global have even demonstrated that they don't respect securities segregation rules. The company/CEO wasn't found guilty of anything! This kind of activity is totally allowed in Wall Street / Bay Street. As retail investors we look at all this and say ... hey no thanks. Buy an annuity and you're basically buying a very long dated obligation, and unless I have 100% faith in the insurance company, I'm not going to do it.


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## lonewolf (Jun 12, 2012)

To bad Weiss an independent rating company did not rate Canadian institutions their track record in the U.S has been pretty good. Maybe it is better to go with a U.S insurance company to get an independent rating ?

Swiss annuities which can be purchased in differnt currencies & can be structured a lot differntly then the annuities sold by insurance companies in Canada many of the so called wealth protection gurus say are the soundest insurance companies in the world. Not sure if they can be purchased in Canada without going to Switzerland. I think Swiss annuities over annuities sold by Canadian insurance companies is the way to go they are structured so much better.


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## andrewf (Mar 1, 2010)

james, there are different risk tolerances. You happen to be very intolerant to risk--that's okay.


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## CanadianCapitalist (Mar 31, 2009)

There is a lot of fear mongering on this thread. Insurance companies are highly regulated entities. The OSFI keeps a close watch on them and has a mandate to intervene aggressively should such a situation arise. Nevertheless, it is best to stay within Assuris limits by splitting coverage from different insurers just in case. 

Of course, one can never be 100 percent sure that Assuris will make good on its promises. The alternative is assuming longevity risk on your own and that's not a better option IMO.


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## marina628 (Dec 14, 2010)

I do not fear insurance companies but even reading books about this subject I know this product is not for me because of my personality and also my risk tolerance.I am sitting on nearly 3 million cash in a corporate account trying to figure what to do with it and not once have I considered giving even 10% to buy Annuity.BTW yesterday was our year end so CRA will be very happy when we file this year , I will need a bit of therapy passing over that cheque because of the sale we did in January.


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## james4beach (Nov 15, 2012)

I realize I have a low tolerance for risk.

But in case you all forget, AIG and major European insurance companies collapsed just within the last 5 years. The dangers I'm talking about are not rare, once-in-a-blue-moon, or tinfoil hat. Financial firms including insurance co's have been dropping like flies in the last few years so I think my concerns are totally justified.

Currently, today, many European insurers have substantial failure risk.

But yes this is all about balancing risks. Would I rather take longevity risk myself (in my self managed portfolio) or transfer to an annuity and swap that risk for counterparty risk? Good question... it all depends on the specifics


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## andrewf (Mar 1, 2010)

What were client losses like for those big insurance cos on products like life annuities?


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## CanadianCapitalist (Mar 31, 2009)

andrewf said:


> What were client losses like for those big insurance cos on products like life annuities?


Nil as far as I know.


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## MoneyGal (Apr 24, 2009)

None, and I actually do know. :02.47-tranquillity:


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## GoldStone (Mar 6, 2011)

CanadianCapitalist said:


> There is a lot of fear mongering on this thread.


There is a lot of fear mongering on this _forum_.


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## andrewf (Mar 1, 2010)

It was a rhetorical question, but thanks for chiming in.


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## sags (May 15, 2010)

If one had a large amount of cash to invest in an annuity...........does putting it into one fund have any "financial return" reward, over splitting it up with different companies?

IE............is there a payout incentive to deposit it all in one company?


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## MoneyGal (Apr 24, 2009)

andrewf said:


> It was a rhetorical question, but thanks for chiming in.


Aw, I even knew that, and I still piped up! Couldn't help myself, I guess.


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## IvonHughes (May 28, 2013)

A lot of these comments assume you will always be able to manage your own financial affairs, quite apart from the fact you need to manage them correctly, reading forecasts etc,etc.

The idea of passing this risk to a highly regulated insurer has to be compared to your own ability to manage the risk for the rest of your life.

If you die and leave a mess for your beneficiaries, you won't get any prayers for your immortal soul!


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## IvonHughes (May 28, 2013)

sags said:


> If one had a large amount of cash to invest in an annuity...........does putting it into one fund have any "financial return" reward, over splitting it up with different companies?
> 
> IE............is there a payout incentive to deposit it all in one company?


Probably not. And certainly not if the payout exceeds $2k a month as you reduce your Assuris coverage from 100% to 85%.


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## andrewf (Mar 1, 2010)

I think it's an excellent point, Ivon. An annuity is a way of hedging your senescence risk. Annuities, once purchased, are low risk from the perspective of making mistakes in management. That includes protecting yourself somewhat from being taken advantage of.


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## james4beach (Nov 15, 2012)

Those are all good points above

But I'm not sure it's right to call these questions and concerns "fear mongering". The media is overrunning us with positive, no-downside-risk financial products all the time and personally I don't see a lot of critique of financial products out there. There was no critique of anything pre-2008, either.


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## sags (May 15, 2010)

From using some annuity calculators myself, it looks about right that for the first 20 years, the investor receives their own money back. After that, there would be a few more add on years to represent the return on capital.......even at GIC rates of return.

So longevity risk to the annuity provider seems to kick in about age 90. After that age, the provider assumes the cost.......but that is balanced by annuity holders who pass away before age 90.

It looks like the decision really starts with age 90 (for people buying an annuity at age 65),

I would think simple government Treasury bills or GICs, could be set up with automatic withdrawals, similar to an annuity.

There would be no investment risk in that scenario, and the funds would be guaranteed by the government, if allocated properly.

It looks like the decision is the willingness to lose the capital if death should occur early in retirement.............versus the safety of having the income guaranteed past the age of 90.

Personally, I doubt I will be around by age 90..............and if I am would likely be in a nursing home and have no dire need for the annuity payments.

Others may have more confidence in their longevity and health prospects, and consider the situation differently.


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## andrewf (Mar 1, 2010)

I don't think you want to be stuck in a cut-rate nursing home.


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## marina628 (Dec 14, 2010)

I am not sure what a nursing home cost per month but my neighbor just sold his home and paying $3100 a month for a retirement home.


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## sags (May 15, 2010)

In this area, the cost is around $2000 a month, and people are assigned to nursing homes according to availability. They go on a waiting list, and can list their preferred home, but it doesn't guarantee they will be placed there.

If people don't have enough income, the government pays the difference.


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## lonewolf (Jun 12, 2012)

Why not by pass the middleman (insurance company) by forming a group of investors that pool their money so when someone dies it goes into the pot for the other members ?

The government destroys the money world. No way is it going to make good on all its IOUs. Anything that the masses think is safe because it is insured by the government scares me. Many consider Swiss annuities the safest in the world & they are not insured by the promise of an undisciplined government that @ some point wont make good on its IOUs. You got to be kidding me if you think the government can safe the world.


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## HaroldCrump (Jun 10, 2009)

lonewolf said:


> Why not by pass the middleman (insurance company) by forming a group of investors that pool their money so when someone dies it goes into the pot for the other members ?


That is a tontine, and it already exists.
In a way, annuities and govt. pensions (like OAS) have features of a tontine.
Those that die on or before the average mortality rates subsidize the higher returns of those that beat the rates.


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> That is a tontine, and it already exists.
> In a way, annuities and govt. pensions (like OAS) have features of a tontine.
> Those that die on or before the average mortality rates subsidize the higher returns of those that beat the rates.


Tontines are usually illegal, what with the incentive to kill the surviving members.


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## andrewf (Mar 1, 2010)

dotnet_nerd said:


> Are there normally minimums for buying annuities?
> 
> And can an annuity be purchased from a blend of registered/non-registered funds?
> 
> ...


Based on what Ivon said earlier, they would have to be two separate purchases.

Actually, come to think of it, I don't think you can buy an annuity within a TFSA (such that the stream of payments is non-taxable).


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## MoneyGal (Apr 24, 2009)

My former boss and co-author is writing a book (for Cambridge U Press) on tontines. See for ex: http://online.wsj.com/article/SB10001424127887324532004578358110813542442.html

and more: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271259

Very interesting reading, and I know you aren't terrified of the math, andrewf! (although actuarial math is kind of a horse of a different colour)


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## Retired Peasant (Apr 22, 2013)

andrewf said:


> Tontines are usually illegal, what with the incentive to kill the surviving members.


and yet life insurance isn't illegal, what with the beneficiary's incentive to kill.


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## andrewf (Mar 1, 2010)

Presumably the beneficiary has non-monetary motivations, and aren't usually part of the same cohort (ie, likely to die around the same time). That is, most beneficiaries are either spouses or children, and not strangers roughly the same age as the insured.

A tontine is like me buying insurance against your house burning down. You shouldn't be surprised to see an increase in arson.


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## MoneyGal (Apr 24, 2009)

hence the need for "insurable interest"

There are a lot of misapprehensions about tontines, and they are illegal in most jurisdictions not because of the "incentive to kill" but because the incentive to fudge the numbers. Seriously, read the first link I posted above.


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## HaroldCrump (Jun 10, 2009)

I didn't mean OAS *is* a tontine, just that it has certain features of one.
lonewolf wondered why don't we cut out an insurance company middleman and just re-distribute the pot among the (reducing) list of survivors.
That would be a tontine, and we do already have some of that in various forms.


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## andrewf (Mar 1, 2010)

Tontines with large enough pools should be fine, with some mechanism to merge them or wind them up (ie, terminate and distribute the remaining NAV) when the number of surviving participants becomes too small. In principle, I don't think they need to be banned, I just don't envisage a lot of demand for them. The exponential payout growth doesn't really match well with retirement income needs.


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## IvonHughes (May 28, 2013)

dotnet_nerd said:


> Are there normally minimums for buying annuities?
> 
> And can an annuity be purchased from a blend of registered/non-registered funds?
> 
> ...


 
Non registered and registered policies cannot be joined due to the different tax treatment.

And different companies have different minimums.


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## lonewolf (Jun 12, 2012)

If a large credit union offered a large pool of GICs that were set up in such a way that if someone dies the money would be split up between the other members of the pool I would definately be in with a portion of my money. It would be like a turbo charged GIC from an instution with no conflict of interest like a bank. The pool would have to be large enough so no incentive to kill.


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## james4beach (Nov 15, 2012)

I was thinking the exact same thing, lonewolf. Nothing like this exists? An institutional structure, but as a credit union so as to share in the profits.


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## MoneyGal (Apr 24, 2009)

James, I don't mean this to sound harsh, but part of the reason your criticisms of annuities/structured products don't have as much credence as they would otherwise have is that you don't know enough about the products you are criticising before you come out with all guns blazing. 

In concept what you are describing is a tontine. If you spent a moment to read the links I posted upthread you would have a much better understanding of how these products work structurally, and in what forms they are available. Then you could spend a moment to read about how the insurance industry in Canada is structured to learn the regulatory limits on the kind of product you are envisioning.


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## pwm (Jan 19, 2012)

I just finished reading "Pensionize Your Nest Egg" and I would highly recommend it for anyone approaching, or already in retirement. I started reading the book with a slightly negative bias toward annuities, but I tried to keep an open mind, and now I have a new appreciation for the value of annuities.

I've been retired for 8 years, and even though my RSQ is 100% I still intend to include the possibility of buying an annuity sometime in the future. For those who haven't read the book, RSQ is your "Retirement Sustainability Quotient", which is basically what portion of your income in retirement already is from pensions or annuities.


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## MoneyGal (Apr 24, 2009)

(In my house, though, it is also "Romance Sustainability Quotient" ha!)


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## humble_pie (Jun 7, 2009)

re tontines, i can't remember any more details but there's a movie or a book about a self-financing group of friends that set up a tontine.

finally things came down to 2 old men left alive. They met & looked at each other, then burst into tears, realizing that one of them was going to wind up with all of the money but he would also be completely alone ...


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## fraser (May 15, 2010)

I agree. I think that annuities can be a very good solution for some people, depending on their financial situation. One thing that struck me about Pensionize Your Nest Egg was the emotional comfort of having an annuity vs. the drawdown method. 

I am not certain if anyone has ever lost money in an annuity from a Canadian insurance company based on a corporate failure. 

I would not consider one today since I have a DB but who knows what the future will bring. I would split the annuity up between several insurance companies if I were to do this. 

I would also hazard a guess that an insurance company annuity can be more secure than some private sector or pooled DB's given the Assuris component.


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## olivaw (Nov 21, 2010)

I too read "Pensionize Your Nest Egg" and it changed my mind about annuities for the very reason that fraser outlined. The emotional comfort of a guaranteed steady stream of income may be worth paying for because I don't have a DB pension. Moneygal (the author) will correct me if I am wrong but my takeaway was that only a portion of retirement savings needs to go into an annuity. 

That said, it took me decades to save for retirement. It isn't going to be easy to give a sizable chunk of my savings to an insurance company.


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## MoneyGal (Apr 24, 2009)

So don't give them a sizeable chunk! Give them a little bit, and then a little bit more over time: you can DCA into annuities just like you can DCA into a stock portfolio.


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## james4beach (Nov 15, 2012)

MoneyGal said:


> James, I don't mean this to sound harsh, but part of the reason your criticisms of annuities/structured products don't have as much credence as they would otherwise have is that you don't know enough about the products you are criticising before you come out with all guns blazing.


MoneyGal, then let's focus on the original topic and the product you are an expert in: an annuity.

Tell me what your thoughts are on the *counterparty risk with an annuity*. There _is_ counterparty risk, right? And the insurer is a non-government entity with a limited pool of money.

And I know you wrote that so far there have been no client losses on annuities due to insurance company insolvency. I presume you mean in Canada, and that's great of course. Have customers anywhere in the world suffered losses in annuities? There are many things that haven't happened yet in Canada, but have happened elsewhere, that still should be a concern for Canadian investors. Collapse of a large bank, for example.

Say an investor pours their life savings into an annuity from Manulife, and then Manulife goes broke in 10 years or something. What happens to the guarantee of the annuity contract?

If the whole point of an annuity is to give peace of mind etc ... do you think a retiree would lose some of that peace of mind when they see the issuer of their annuity collapse in a bankruptcy? Would such a process cause them anxiety and stress?

And if you're confident that a purchaser of a Canadian annuity could not possibly lose any money, then tell me -- who is eating the counterparty risk? I'm just struggling to understand where the money comes from, to make the contract whole.


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## MoneyGal (Apr 24, 2009)

Well, Moshe and I did write about this in PYNE ("pine" in my household). 

Counterparty risk is real, and there are a number of strategies investors can use to protect themselves against the risk of default. Principal among them would be: annuitizing smaller amounts, checking the credit rating (and reinsurance contracts) of the issuer, and spreading purchases over time and issuers. Large bets are _ipso factor_ riskier and it is prudent to be aware of the risks you face and how to hedge them. 

Note that the risk of a DB pension issuer (i.e., Nortel) defaulting is another form of counterparty risk. The situation in which a retiree has gambled all of their fortunes on a single company via company stock + human capital [paycheque] + DB pension are the most at risk of counterparty default, NOT those who purchase annuities from a regulated issuer.


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## james4beach (Nov 15, 2012)

MoneyGal, wow great response and very informative. That sounds totally sensible.

And I agree with you, absolutely a DB pension from a single company (like Nortel etc) is a huge counterparty risk issue.


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## sags (May 15, 2010)

Counter party risk for DB pensions would only be the loss of benefits for the underfunded % of the fund.

The funds are kept separately and audited by government regulators, so the chance of a fund being 100% underfunded is nil.


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## fraser (May 15, 2010)

That may be so but tell that to the Nortel pensioners or the Gay Lea/Co-OP pooled pensioners who lost, as I understand it, anywhere from 30 to 50 percent of their pension entitlements.

I did not think much about annuities until I read Pensionize Your Nest Egg. The book makes a very good case for someone who is nervous to at least lock in for a certain income stream. Given the right circumstances and interest rates I think that an annuity could be very good for some people as a component of their overall plan. 

I do not know if any annuity holders in Canada have ever lost money from a company failure.

One thing for sure, assuming Assuris is good for the money, an annuity could be far better that a DB plan in a failing or bankrupt company, or in a failing pooled DB program. Keep in mind that Ontario is the only Province that I know of that has a backup for failed DB plans....and that backup is far from substantial.


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## lonewolf (Jun 12, 2012)

The funds are kept separately and audited by government regulators, so the chance of a fund being 100% underfunded is nil.[/QUOTE]

Sags, the mood of the masses can even effect the most advanced of intellect. Be carefull when government bond yields are @ or near historic lows the confidence in Government is high. 

After Fanni & Freddie Frankenstein why do the masses still think the government is going to save the world ? Maybe it is just time as the 30 year cycle is near its lows. No one wants to take responsibility & wants the government to save them.


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## lonewolf (Jun 12, 2012)

When the government gets involved it makes the financial sector weak. It makes investors wimps by investors not accepting responsibility as they put the responsibility on the shoulders of the government. Get rid of all government backing & let the power of the market make the financial system strong.


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## IvonHughes (May 28, 2013)

I feel there is a lot of anguish and anxiety out there about whether to buy an annuity. So let's just look at you. An annuity is for you alone and you alone can decide what is best for you, not writers to forums or information from books.

Do you feel you can manage your money alone, giving instructions to brokers, controlling fees you have to pay etc ?

Do you want security of your income ?

Do you feel overall that you can at least equal the stock market return?

Can you mentally take a loss? I had clients in 2008 and earlier downturns,that lost 40-50% of their capital. Remember without capital, you don't need to read this forum!

These and similar questions are what you need to answer in your heart and with your spouse. If you lose capital, you are too old to replace it.

Look at the US market today. If it all goes down the tube today or tomorrow, are you geared up for the pain?

Buying an annuity is personal; just make sure you are answering your own questions.


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