Smoothing out the post-work ride

However, it’s important to weigh the pros and cons of these products for individual clients, and to ensure the costs of the products are justified by the guarantees provided.

“We’re living in a world in which unpredictability and volatility seem to be the new norms in the marketplace,” says Peter Wouters, director of tax, retirement and estate planning services with Kingston, Ont.-based Empire Life Insurance Co. “If you have a lot of unpredictability and volatility in the markets, people like to have a certain portion of their investible assets sitting in products that have less volatility, [in] a safe harbour zone that provides downside protection.”

Seg funds and annuities both provide this type of protection and, Wouters says, both products can be important components of a broader mix of products in a client’s retirement portfolio.

Seg funds can provide your clients with peace of mind based on certainty: these products guarantee the return of a predetermined percentage of the original investment (usually, 75% or 100%) once the units in the fund have been held for a specific period of time (usually, 10 or 15 years) or upon the death of the unitholder.

Those features enable your clients to keep their assets invested well into their retirement years without the risk of a market correction significantly eroding the initial investment.

“You can have assets that still are continuing to grow throughout retirement, which could last 30 or 40 years,” Wouters says, “and then you also have those unique protection features of an insurance-based investment contract.”

Seg funds also have various estate planning benefits that make them particularly suitable for the retirement market, says George Turpie, senior vice president, investment funds, product and market development, wealth management, with Winnipeg-based Great-West Life Assurance Co. (GWL), Toronto-based Canada Life Assurance Co. and London, Ont.-based London Life Insurance Co. -all subsidiaries of Winnipeg-based Great-West Lifeco Inc.

“[Seg funds] have features that other products don’t have,” Turpie says, “such as the potential for estate bypass and the potential for creditor protection.”

Those features can make the intergenerational wealth-transfer process much more seamless upon the death of a client, he says.

However, the guarantees and benefits associated with seg funds don’t come for free. The fees on these funds generally are higher than those on mutual funds. And, as many insurance companies have dialed back the guarantees on their seg fund offerings in the past few years, the higher fees have become harder to justify, says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto.

Tward notes that many insurers have extended the amount of time policyholders must wait to receive a 100% maturity guarantee on their investment significantly – to 15 years from 10 years. Insurers also have imposed new limits on the period in which clients can deposit funds that will be guaranteed under the death benefit.

However, Tward says, seg funds can still be useful for retirees who want to invest in riskier assets. “You can invest aggressively, knowing that you can’t lose your principal,” he says.

You can help your clients customize seg funds to individual retirement planning needs by choosing underlying investment funds that are suitable for each client’s risk tolerance and by choosing the levels of guarantees that are most appropriate for each client.

Meanwhile, annuities can provide your clients with a different type of security in retirement, in the form of a guaranteed income stream that carries much of the predictability of a pension. Specifically, life annuities provide retirees with the peace of mind that regardless of how long they live, they will continue to have a steady stream of income. (See sidebar, above.)

“To the extent that people are worried about living a very long time and running out of savings,” Wouters says, “an annuity gives them that baseline income level that’s going to come no matter how long they live.”

Seg funds and annuities form the basis of a retirement-planning program recently launched by GWL, Canada Life and London Life.

The program, called HelloLife, is designed to help you navigate the deaccumulation process with your clients by consolidating their assets, reviewing their goals and risk tolerance, estimating their spending needs in retirement, then designing a portfolio that will provide the appropriate level of income through the duration of a client’s retirement.

“It’s a process that takes clients from those years leading up to retirement, and then into retirement,” says Nick Pszeniczny, executive vice president, individual distribution and marketing, for GWL, Canada Life and London Life.

Depending upon each client’s needs, the program recommends a mix of annuities for income security and seg funds for potential growth.

“The steady stream of income that comes from an income annuity is often compared with that of a pension plan – it can be used to cover day-to-day living expenses,” says Turpie.

“But, by having segregated funds, you get some flexibility in income from year to year to manage different kinds of expenses. And, seg funds will also provide clients with the ability to get some market growth.”

LONGER LIVES AND ANNUITIES

Annuities can play a key role in a client’s retirement plan by helping to convert accumulated savings into a steady, predictable stream of income. For clients who retire without a workplace pension – a reality that reflects a growing proportion of the population – annuities can be especially useful.

“Annuities offer retirees an opportunity to build personalized pensions with some of their savings,” says Peter Wouters, director of tax, retirement and estate planning services with Kingston, Ont.-based Empire Life Insurance Co. “These plans can provide them guaranteed income for as long as they live.”

Squeezed annuity rates

With the extended period of low interest rates having squeezed annuity rates, however, some advisors and clients have shied away from annuities in recent years. “For the most part, you’re getting your money back, with very little in terms of growth,” says Asher Tward, vice president of estate planning with TriDelta Financial Partners Inc. in Toronto. “The rate environment definitely affected that.”

As a result, some clients are steering clear of annuities – at least until long-term interest rates begin to pick up. By waiting, clients also benefit from the fact that the older they are at the time of purchasing an annuity, the higher their annuity payments will be.

However, the opposing argument goes, waiting it out may not be the best strategy for clients, since it’s impossible to predict future payout rates.

Increasing life expectancies

“For the past five years we’ve been anticipating that interest rates would go up, and they’ve gone down,” says George Turpie, senior vice president, investment funds, product and market development, wealth management, with Winnipeg-based Great-West Life Assurance Co. (GWL), Toronto-based Canada Life Assurance Co. and London, Ont.-based London Life Insurance Co. Furthermore, he notes, steadily increasing life expectancy is likely to put downward pressure on annuity rates. “Even if interest rates don’t change between now and five years from now,” Turpie says, “life expectancies will have increased, and that will affect the amount of income that you can get from an annuity.”

Given the unpredictability of annuity rates, Wouters recommends taking a laddered approach. For example, clients could buy one annuity when they retire at age 65, and begin taking a regular stream of income. Then, they buy another annuity at 70 and another at 75. “Even if interest rates don’t improve dramatically over that time,” Wouters says, “because you’re older, your income is going to go up anyway. And if rates are going up, then you’re getting a double benefit.”

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