While the decline of defined-benefit pension plans puts greater investment risk on employees, they do have options for securing at least a partially guaranteed benefit.
Some plan providers now offer deferred annuities within group retirement plans for employees who feel more comfortable knowing what their payments will be in retirement. It’s not right for everyone but it may be good for investors who can’t handle the uncertainty of the markets and wants a more accurate view of their income in retirement.
How do deferred annuities work? Sold by insurance companies, deferred annuities require investors to pay in return for a guaranteed source of income that lasts for a defined period, typically for life.
Annuities haven’t been popular during the last couple of decades due to low interest rates, fees and changing mortality tables. Some people, however, are willing to live with those downsides to avoid seeing their retirement fund value fluctuate.
A popular way for investors to deal with market fluctuation is to invest in assets with non-variable returns such as guaranteed investment certificates or short-term bonds. Those options are suitable for investors who are risk averse but whose potential to outlive their retirement funds may be a possibility. Deferred annuities offer lifelong retirement income.
The biggest disadvantage of deferred annuities is investors’ capital is gone when they purchase an annuity. As a result, they can’t draw on funds in the case of an emergency. Many plan providers offer commuted values of the deferred annuities to account for situations where, before drawing any income, an investor decides not to proceed with the annuity or there are life events such as serious illness or divorce that require immediate access to cash.
Statistics show a significant number of Canadians remain uncertain about their retirement. Many companies that have undergone a change to a defined-contribution pension plan hear feedback from employees that they’re unhappy with the investment risk that they now have to take on. Providing a deferred annuity option in the plan can be a way to alleviate some of the discontent stemming from the transition from a defined-benefit plan. The benefits are clear for both employees and employers.
Scott Anderson is the vice-president of retirement at HUB International STRATA Benefits Consulting. The views expressed are those of the author and not necessarily those of Benefits Canada.