What is Better than an Annuity for Retirement

What is Better than an Annuity for Retirement. A simple investment option to provide you with dividend income while at the same time holding on to your original capital. A Canadian Perpetual Preferred stock from an insurance or bank will do the trick. Pick an issuer with a credit rating of Pfd-1 or Pfd-2 for greater security and minimum default risk.

Written By Canadian Preferreds

On December 21, 2019
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There have been a lot of articles written on this subject, presenting a lot of information with the pros and cons. In this article I will explain, What is Better than an Annuity for Retirement, in a few paragraphs and show what to buy today. Simply put, you can purchase,  today, one of the perpetual preferred shares offered by either a bank, insurance company or a large utility. The dividend from this type of issue, can provide a better source of income and a higher return on the initial capital.

Why a perpetual is Better than an Annuity for Retirement

I present you with simplest, and easiest understood reason.  Say you purchase an annuity from Sun Life. You will have to give Sun Life the capital upfront. Once you purchase the annuity, your capital is gone and in return Sun Life will pay you a monthly income. Using the Sun Life annuity calculator, you can go through the process and see what you can expect to get for your initial investment. Using this calculator, I found out that for $100,000 I will get, a lifetime yearly payout of $4,619 before tax and $4,280 after tax. That is a yield of 4.280% to 4.619% depending on your personal tax situation.

Now, let’s see what you can expect if instead you purchase one of the Sun Life Preferred Shares.  As you can see from the table below, Sun Life Perpetuals pay between 5.19% and 5.28%. In other words you can expect between $5,190 and $5,280 in dividends annually. Sun Life has 5 perpetuals, so your income will vary slightly depending on which one you elect to purchase. As you can see there is a slight mispricing taking place.

Benefits of Preferreds Over Annuities

The way I see it, there is very little risk here.  And, in addition:

  1. You still are in control of your money. The $100K you invested to purchase the preferred is still in your account. In contrast, purchasing the annuity requires you to give away the $100K.
  2. Risk is almost the same. If Sun Life fails, your annuity will also be affected.  (There are rules to provide for some type of insurance – read more here).  This is a very unlikely scenario due to all the regulations around insurance companies.
  3. Holding the perpetual outside your TFSA and RRSP will also provide you with the dividend tax credit. Depending on you specific tax situation, this could raise your after tax payout by up to 30%.
  4. Depending on the purchase price of the issue, you may have the opportunity for capital gains if you sell the shares sometime later on.  There are valid reasons where you may decide you want to switch to a different preferred thus resulting in a capital gains. This is not available if you purchased an annuity.

Conclusion – What is Better than an Annuity for Retirement

You can get better returns AND keep your original capital by purchasing a preferred. In the simplest scenario, you can purchase a preferred from the same insurance company you would purchase the annuity.  You get even better returns if you do some homework and pick a preferred or reset from a company with a high credit rating.  This is very easy since we provide you with the tools to make the selection. Here is a list of option ranked from the simplest first to most complicated last.

  1. Unlike annuities, with preferreds you can be highly diversified. Split your investment among all issuers with investment grade rating. Allocating your funds across all sectors (Insurance, Banking, Utilities, Telecom, etc) provides protection against market crashes, while at the same time guaranteeing a fair yield.
  2. Pick a perpetual from one of the large insurance companies like SLF or MFC.
  3. Select a perpetual from one of the companies with High Credit Rating.
  4. Consider a reset from one of the companies with High Credit Rating.
  5. Choose a preferred from one of the companies with Investment Grade rating (Pfd-2H, Pfd-2, Pfd-2L).

You have options to choose from. You can be very conservative or you can go for maximum yield by taking on some risk. If you can keep on top of it, getting a great yield is very easy. We provide you with updated information on all preferreds, so you can re-evaluate your plan on a regular basis with little time and effort.

 

Canadian Preferred Shares – Mission

Our mission is to provide the average investor with the knowledge, up to date information, latest trends, data and tools to select the best preferreds to purchase or sell today.

Without tools like the ones we provide here, its simply not possible to make an educated decision, thus keeping most individual investors away. Our tools provide an overall view, of the preferreds market. With a few clicks you can easily locate today’s best preferreds within a sector/category or across the whole market.

Using our homepage as a starting point you can access all of our tools.

4 Comments

  1. ASH PURI

    I find your logic flawless and have been slowly working myself to a similar portfolio over the last 10 years after retirement. Given the current government deficits, I have been worried that inflation could eventually come back. So I have 70% resets and 30% perpetuals since resets provide some protection against inflation. Your 50-50% allocation is a good place to start.

    Reply
    • AAlex

      Ash, Thank you for your comment.

      Reply
    • Alex M

      While this is an intriguing thought, one very important caveat is that it makes a huge difference if the funds are in an RRSP or are unregistered. Taking the funds out of the RRSP means taking a big tax hit and therefore buying fewer shares. Of course, the dividend tax credit is inapplicable within an RRSP. Secondly, remember that RRSPs must be converted to something else when you turn 71. You can make it a RRIF, but then you are subject to minimum and maximum withdrawals.

      I happened to have bought an annuity a year and a half ago, so used your example of SLF pfd shares vs the annuity (which happens to be with Sun Life). I end up with 20% less per month income using the preferreds (pre tax basis).

      In short, this may well be worth considering for some people, depending on their financial profile, but by no means is it a slam dunk, and you have to be very careful to work out the full implications. Having said that, at least if you buy the preferreds, you can change your mind about it later. The annuity is irreversible.

      Reply

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