Variable Payment Life Pension
A variable payment life pension is a retirement savings withdrawal option available to everyone. It allows you to convert your savings into retirement income.
Definition
A variable payment life pension is defined as follows:
Pension
- It is a
periodic income: pension payments are made at regular intervals, for example, every month.
Life pension
- The pension is
payable for life
Variable payments
- The
pension amounts vary: they take into account the return on investments and the longevity of the fund's beneficiaries (or deaths among these persons).
How it works
The characteristics of the variable payment life pension are the following:
- A variable payment life pension is a withdrawal option based on personal choice.
- A person decides how much of their retirement savings they would like to transfer to a fund designated for the payment of a variable payment life pension (variable payment life pension fund).
- A variable payment life pension fund is accessible via a voluntary retirement savings plan (VRSP) or a defined-contribution pension plan.
- A variable payment life pension fund is "collective," since it combines the retirement savings of more than one person.
- The variable payment life pension begins being paid immediately after the transfer of the
retirement savings into the variable payment life pension fund.
- The amount of the variable payment life pension is calculated based on an interest rate called reference rate.
- Payments of a variable payment life pension increase or decrease from one year to the other to take into account the returns on the variable payment life pension fund. For example, a return higher than the reference rate results in an increase in the variable payment life pension amount.
- The variable payment life pension amount is adjusted periodically to take into account the longevity of the beneficiaries of the variable payment life pension fund. For example, it slightly decreases if the beneficiaries live longer than expected.
- A variable payment life pension can include coverage in the event of death. Certain conditions apply. The available options are specified in the provisions of the plan.
- No contributions can be required from an employer party to the plan to finance a variable payment life pension fund.
The variable payment life pension amount is calculated as follows:
- The initial amount is determined based on the beneficiary's age and sex, the death benefit chosen by the beneficiary, as well as the reference rate and the fund's mortality assumption, that is, future expectations regarding the mortality experience of the fund's beneficiaries.
- Every year, the amount of the variable payment life pension is adjusted to take into account the return generated from the fund's investments. To do so, the pension amount is adjusted by the following percentage:
- At least once every three years, the amount of the variable payment life pension is adjusted to take into account the mortality experience of the fund's beneficiaries.
Example
Sylvie is age 70. She transfers a portion of her retirement savings on 1 January, that is, $100 000 into a fund to receive a variable payment life pension. The reference rate is set at 4%.
Sylvie receives a variable payment life pension of $600 per month for the first year.
The return generated from the fund's investments during the first year is 7%. The amount of the variable payment life pension increases by around 3%, that is:
Sylvie receives $615 per month during the second year.
During the second year, the return generated from the fund's investments is 2%. The amount of the variable payment life pension therefore decreases by around 2%, that is:
Sylvie receives $605 per month during the third year.
During the third year, the return generated from the fund's investments is 6%. The amount of the variable payment life pension therefore increases by around 2%, that is:
It reaches $615 per month. However, since there have been no deaths among the fund's beneficiaries over the past three years, the variable payment life pensions must be reduced by 1%. This corresponds to a periodic adjustment related to the mortality experience. As a result, Sylvie receives $610 for the fourth year.
The variable payment life pension amounts are provided for information purposes only. The actual amounts depend on the reference rate, the person's age and sex, the mortality assumption, as well as the death benefits chosen by the person. The amounts also depend on the fund's specific experience.
Advantages
A variable payment life pension can provide greater peace of mind to the beneficiary, especially when he or she reaches an advanced age. The decisions required from him or her are taken before the payment of the variable payment life pension begins.
The fund combines the longevity risk of its beneficiaries. The longevity risk is the financial risk associated with the probability of living longer than expected and exhausting one's savings before death.
The amounts contained in the fund are invested based on an investment policy determined by the plan administrator in which the fund is established. The person is therefore not responsible for deciding how to invest his or her savings.
The amount of a variable payment life pension is calculated based on specific parameters. This means that the person does not need to worry about the amount of the withdrawals to be made from the fund once their variable payment life pension begins being paid.
The person who chooses to receive the variable payment life pension retains the rate of return risk. He or she experiences both the good and poor returns of the fund. When the returns generated from the investments are higher than the reference rate, the amount of the variable payment life pension increases. This allows the person to benefit from years of good returns, either through growth in the value of investments or high investment income.
Combining amounts in a fund provides access to investments with higher potential for return, as well as investment specialists. It also allows for economies of scale, that is, to benefit from fees that are generally lower than those applicable to individual savings.
Points to consider
A variable payment life pension may cause concern due to a potential decrease in the pension amount.
A person who chooses to receive a variable payment life pension decides to transfer his or her retirement savings into a fund from which the variable payment life pension will be paid. He or she cannot change his or her decision.
A person who chooses to receive a variable payment life pension retains the rate of return risk. He or she experiences both the good and poor returns of the fund. When the returns generated from the investments is lower than the reference rate, the amount of the variable payment life pension decreases.
Good to know
To mitigate this risk, the person could use a portion of his or her retirement savings to receive a variable payment life pension and keep the rest of his or her retirement savings to use for other purposes.
The tax-sheltered retirement savings accrued can be transferred into a variable payment life pension fund. However, the savings accrued in a personal or collective
TFSA cannot be transferred into a variable payment life pension fund, even if the savings are intended for retirement. Similarly, cash, regardless of whether it is invested, cannot be transferred to a variable payment life pension.
Person who can apply for a variable payment life pension
In general, any person who has retirement savings can choose to receive a variable payment life pension.
The decision to choose a variable payment life pension is personal, and there may be many reasons for choosing one. Here are a few examples:
- The person believes that he or she could live longer than the average person.
- The person wants to be able to count on retirement income in his or her advanced age.
- The person wants to simplify the management of his or her investments of his or her retirement savings.
- The person does not want to manage the withdrawal, in whole or in part, of his or her retirement savings.
Important! Make a choice adapted to your situation
A person should plan his or her withdrawal strategy before transferring, in whole or in part, his or her retirement savings into a variable payment life pension fund. If necessary, the person can contact a financial planner.
Requirements to apply for a variable payment life pension
A person who can apply for a variable payment life pension must be
age 55 or over or be the
minimum age specified in the provisions of the plan if it is under 55.
If it is a variable payment life pension under a supplemental pension plan, the person must also be:
- either a member under the plan who ceased to be an active member;
- or the
spouse of a deceased member under the plan.
If it is a variable payment life pension under a voluntary retirement savings plan (VRSP), the person must also be:
- either a member under the
VRSP who is entitled to the transfer or the refund of the amounts credited to his or her account;
- or the
spouse of a deceased member under the VRSP;
- or a person who has retirement savings and decides to transfer them into a VRSP.
Good to know
- Any person who has retirement savings can receive a variable payment life pension offered under a VRSP.
- The plan administrator must provide the person with an estimate statement of his or her variable payment life pension
before transferring his or her retirement savings into the variable payment life pension fund.
Variable payment life pension fund
The fund in which the retirement savings are transferred for the payment of a variable payment life pension is called a variable payment life pension fund.
The amounts transferred into a variable payment life pension fund are combined and invested in order to provide a variable payment life pension for each beneficiary of the variable payment life pension fund.
The returns generated from the fund's investments depend on the fund's investment policy, which is established by the plan administrator.
Plans that can offer a variable payment life pension fund
The plans that can offer a variable payment life pension fund are:
These plans are not required to offer a variable payment life pension fund. The decision to implement one is made by the person or body empowered to amend the plan if it is a supplemental pension plan or the plan administrator if it is a VRSP.
The plans that
cannot offer a variable payment life pension fund are:
Amounts eligible for a variable payment life pension fund
The amounts that can be transferred into a variable payment life pension fund come from the account or accounts of the plan that offers the fund.
Furthermore, any other retirement savings can be used to supply a variable payment life pension fund implemented under a
VRSP provided that it first transits through the
VRSP's accounts. The savings can come from:
- a supplemental pension plan, including a simplified pension plan (SIPP);
- a deferred profit-sharing plan (DPSP);
- a locked-in retirement account (LIRA);
- a life income fund (LIF);
- a registered retirement savings plan (RRSP);
- a registered retirement income fund (RRIF).
Important! Amounts that cannot be transferred into a variable payment life pension fund
It is
not allowed to transfer the following into a variable payment life pension fund:
- cash;
- money from a checking or savings account;
- money from a tax-free savings account (TFSA).
Summary
-
DPSP : Deferred profit-sharing plan
-
LIF : Life income fund
-
LIRA : Locked-in retirement account
-
RRIF : Registered retirement income fund
-
RRSP : Registered retirement savings plan
-
SIPP : Simplified pension plans
-
SPP : Supplemental pension plan (there are three types: defined-contribution pension plan, defined-benefit plan and target-benefit plan)
- Variable payment life pension fund : Variable payment life pension fund implemented under a supplemental pension plan or a
VRSP
-
VRSP : Voluntary retirement savings plan
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