# RRSP Bridge to Deferred Annuity?



## doc (Jan 15, 2010)

I would like the option to take early retirement at 55.

I will elect to defer my federal pension until 60.

Can I withdraw RRSP contributions to bridge this gap? This would trigger taxation at a much lower marginal rate than withdrawal after 60.

Thoughts?

Thanks andrew


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## MoneyGal (Apr 24, 2009)

If by "can" you, you mean "is this allowable?" then the answer is yes. If you mean "should" you, the answer is I don't know. 

Will your pension provide sufficient income in retirement? If yes, then I don't see any problem with your proposed course of action. 

BTW, a federal pension is not a deferred annuity; it is a pension. "Life annuity" (whether immediate or deferred) is the closest thing the private market has to a DB pension, but it isn't a pension _per se_. Unless you mean you intend to take the cash value of your pension and purchase an annuity (or a deferred annuity) with the lump sum -- but that isn't what you've asked, I don't think...


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## Four Pillars (Apr 5, 2009)

As MG said, you can do whatever you want with your RRSP.

I think that sounds like a valid plan although you certainly have to consider that you are giving up 5 years of pension income. I would assume that by deferring the income amount is higher?

You also don't have to spend the rrsp withdrawals - if you withdraw $100k per year and only need $40k then after taxes you can save the remainder in a TFSA.


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## doc (Jan 15, 2010)

MoneyGal: Thanks for you reply. Your first answer - "can" answered my Q...

Regarding federal gov't pension: There is a penalty of 2% per year if I take my pension early (since I won't be eligible for immediate annuity based on my years service and age). However I can elect to take a deferred annuity at 60 without penalty. Cheers


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## MoneyGal (Apr 24, 2009)

Hmmmm. Interesting. Is it an actual deferred annuity, purchased from an insurance company? 

The reason I ask is that the federal DB entitlements are known and legislated. The entitlements from an insurance company would not be certain and would be subject to negotiation/choice (i.e., full indexing to inflation, partial indexing...). 

Also, if the annuity is purchased on the open market, you need to consider the creditworthiness of the issuer - a non-issue if it is a federal DB pension. 

I don't know that much about federal civil service pension choices, though.


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## MoneyGal (Apr 24, 2009)

Oh - reading your second response again -- it looks as though you are using the terms "immediate annuity" and "deferred annuity" to mean "immediate pension" and "deferred pension."


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## doc (Jan 15, 2010)

MG: Sorry for the confusion...yes, your last post is the wording I probably should have used!


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## OhGreatGuru (May 24, 2009)

In doc's defense, the federal Superannuation Plan does use the terms "immediate annuity" and "deferred annuity" in it's information booklet, although the meaning is more properly "immediate pension" and "deferred pension". This is because "annuity" is the term used in the Public Service Superannuation Act.


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## OptsyEagle (Nov 29, 2009)

Doc, you should keep in mind that the penalties that are rendered upon early activation of the pension (2% per year as you state, although I somehow thought it was closer to 5%, but you should know) is simply to pay for the extra pension that would be paid to you earlier. It is not a penalty, but more a fact of math and finance.

What I am saying is you should do a calculation, knowing that you will be giving up 5 x annual pension to save 10% of your annual pension starting at 60. Not sure this is a good idea.

If I use the example of $50,000 per year. You give up $45,000 per year (90%of $50,000) times 5 years, or $225,000 in total, to save $5,000 per year, starting at age 60. You should recheck your numbers. Now there are taxes here to be considered but I doubt I would do it if it were me.


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## osc (Oct 17, 2009)

Shouldn't start taking government pension before 70 if you are not in a health risk group and if you have other means of living. With RRSP you would be forced to liquidate by 94 anyways.


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## leslie (May 25, 2009)

I don't know any way to get an answer with simple math. I don't agree with the math above. There are too many moving parts.

You have to create a spreadsheet with lines for every year until your expected death. Track both the 
* RRSP balance and its income, along with 
* the pension income under both assumptions. You must 
* make assumptions about the rate of return earned on RRSP assets and 
* your AVERAGE tax rates, and
* your expected age at death.
* Plug in your expected living expenses drawdowns.


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## leslie (May 25, 2009)

That said, intuitively I would say:

If you plan on dying before normal (say 85) I would take the pension now and either live high on the hog using the RRSP as well, or save the RRSP for your children when you die.

If you plan on living long, then use the RRSP now. Save the larger pension for later when you will benefit from its longevity insurance for an extended period.


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## Reflector (Jan 28, 2010)

*Cavet about taking deferred annuity*

If you take deferred annuity, you lose the option to continue with term life insurance and membership in the health benefits plan. These are not easy to replace (or cheap) as you get older, but that may be when you need them the most.


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