Sun Life Payout......ideas appreciated | General financial discussion | Discussion forum

First, a disclaimer. I don't know anything at all about "old endowment policies".

Are you saying that if you buy an annuity, you get to defer the tax hit so that you pay tax on the annuity payments only?

I would try to work out all the financial implications over time. Generally, I would say 65 is a bit young to buy an annuity. Also, rates are probably crappy right now. Daryl Diamond, whose book i believe you have on your shelf, says annuities are best purchased at age 76+, and Gordon Pape recommends 80+ because the payouts are significantly better. And then there's the question of what kind of annuity would you buy. The number of options is staggering, and you are still relatively young, so there would be a lot to consider.

On the other hand, presumably the tax on the dividends would count as a dividend tax credit, so it could actually be quite a good deal for you. Sooner or later there will be tax in some form or other! Tax on dividends is the cheapest. On the other hand, there is the gross-up that they add on to your taxable income which could lead to loss of some freebies.

Take a look at Master your retirement: how to fulfill your dreams with peace of mind. 2nd ed. by Nelson, Doug. (Winnipeg: Knowledge Bureau, 2011.)
The author says that, based on 2011 figures and on Manitoba tax rates, you pay almost nothing on eligible dividends if your income falls below $41,600, and is only 10.3% with income up to $67,000. You can follow his math and apply it to BC rates now, but it's unlikely to be dramatically different. That's hard to beat and might be worth a one-time hit on the Senior tax credit.

I would look at the option of buying SunLife investment products in the same light as any other investment, i.e. does it meet your investment criteria?

Based on what i know so far, I would take the money, pay the tax on the dividends, and then run with it.

One doesn't have to look at only life annuities. There are also term-certain annuities which will pay a fixed amount for a fixed period of time.

Currently, Hubert Financial is offering 5-year term deposits at 2.95%.

A 5-year term-certain annuity with the same rate of return for $20,000 would payout about $4,360 a year for five years. If Sun Life were to offer better than that, then it would be better to go for their five-year annuity than that term deposit.

Loonie said
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I gather, then, that what you mean is that kanaka would basically get all his money back over 5 yrs plus interest with this term annuity, and then he could either walk away with it or buy another annuity?

A term-certain annuity is more like a reverse installment loan. The annuitant would hand a lump sum premium to the insurance company. In return, the insurance company will make the agreed number of payments to the annuitant of an agreed amount.

After the last agreed payment, there is nothing left for the annuitant to walk away with. There's no concept of principal as there is with a term deposit or GIC.

He gets to buy the annuity tax-free. Would I be correct in assuming that he would then pay regular tax, but only on the interest portion of the payouts, just like other non-reg'd annuities, or would he get stung for the whole payout?

I highly suspect that there will be tax on the newly-earned interest portion of the payouts. I'm not sure about kanaka's case when the proceeds of an insurance policy is the source of the premium for the annuity. $15,000 of the $20,000 premium would have been taxable. Maybe $15,000/$20,000 = 75% of the normally-tax-free portion of each payout would be taxable too?

Taxation of annuities is complicated. One will have to ask the insurance company to be sure.

Does "term-certain" mean that it is essentially life-insured? Or, if he didn't survive the 5 yrs, would his heirs lose out on the principal?

I'm not entirely negative on annuities. I just think they are really complicated because there are so many options, and it's hard to find a competent honest broker. I have seen financial advisors who wouldn't touch them because they found them too complicated.

"Term-certain" does not mean life-insured. It means the term of the payments is certain.

If the annuitant didn't survive to the end of the term, then the payments could continue to heirs until the end of the agreed term. I think it is a common feature that the heirs could elect instead to get the present value of the remaining payments on the annuitant's death.

kanaka said

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Here is the annuity options offered.

Term Certain for 3 years - approx $585/mth income for 3 years, with the tax on the $15,000 spread across the 3 years
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Thanks for the update.

I'm not sure how much rounding there was. But, the return on three-year term certain annuity is not that bad compared to current 3-year deposit rates. For comparison, a three-year term deposit at Hubert is 2.55% per annum:

I think your decision makes the most sense if one was going to reinvest the money. One ends up with more money invested for a longer period of time and, consequently, more gain.

The term-certain annuity options make the most sense if one were to spend the money over the term and wished to have a good rate of return on the money as it is drawn down.