Maximize Your Retirement Income: The Unique Benefits of Holding the Longevity Pension Fund Within a TFSA
Simon Barcelon
.10 Aug 2023
.Canadians planning for retirement or already retired have access to several investment accounts to help secure their financial future. Each option provides specific benefits, from pension accounts like LIRAs and LIFs to personal registered accounts like RRSPs and RRIFs, to normal cash accounts. This raises the benefit of thoughtful planning to ensure the optimal use of these account structures. The newest addition to these account options is the Tax-Free Savings Account (TFSA). In this article, we will explore how holding the Longevity Pension Fund within a TFSA offers compelling benefits, making it a valuable addition to consider for one’s retirement portfolio.
Tax-free mortality credits
The primary advantage of holding any asset within a TFSA is the potential for tax-free growth, as these accounts shield assets from taxes on income and growth. This becomes extremely attractive over time with the Longevity Pension Fund because of the Fund’s unique ability to generate mortality credits. As investors exit the pool and leave mortality credits behind, all remaining investors benefit through increases in distribution levels, which can become very attractive over the long term.
This means that any investment gains accumulated within the TFSA, as well as accrued mortality credits, will not be subject to income tax upon withdrawal (unlike when withdrawing from an RRSP/RRIF or a non-registered account). Consider a 67-year-old today with a current yield of 7.12%.* The expected lifetime income received from the Longevity Pension Fund** is shown below on an after-tax basis, whereby the withdrawals from a TFSA are approximately 80% greater than the registered account and 20% greater than a non-registered account:
For illustrative purposes only and not indicative of expected or guaranteed performance by the Fund.
The only lifetime retirement income option within a TFSA
Canadian tax rules do not allow investors to hold annuities within TFSAs, limiting retirees’ ability to secure lifetime income in a tax-efficient manner. In fact, the C.D. Howe Institute, an independent, not-for-profit research institute considered among Canada’s most influential think tanks, recently published Strengthening Retirement Income Security: Fairer Tax Rules and More Options Needed. This report advocates, among other objectives, adding annuities to the list of investment products that can be held within a TFSA. This puts the Longevity Pension Fund in a unique position to help Canadians withdraw lifetime retirement income in a tax-efficient manner as the only lifetime retirement income option available for TFSAs. It’s possible this will change in the years ahead but is not assured.
TFSAs can help reduce OAS and GIS clawbacks
The Old Age Security (OAS) pension is a government program that provides a monthly payment to retirees. Some individuals with lower income receiving OAS may also be entitled to receive the Guaranteed Income Supplement (GIS) pension. These income sources can help retirees fund their non-discretionary expenses (e.g., rent, food, medicine, etc.).
It’s important to note that these programs also include clawbacks based on an individual’s total taxable income, which includes withdrawals from Registered Accounts (e.g., RRIFs and LIFs) that can reduce the OAS and/or GIS payments. This can be significant for lower-income retirees, as the combined impact of income taxes and clawbacks can lead to an effective tax rate greater than 50% up to approximately $15,000 of income received.*** Withdrawals from a TFSA are not considered taxable income and do not factor into the OAS and GIS clawback calculations. This can be advantageous for retirees who want to maximize their retirement income to meet their goals without sacrificing government pension benefits.
The bottom line
Holding the Longevity Pension Fund within a TFSA offers unique benefits that retirees should consider, which can help Canadians retire with confidence and the peace of mind they deserve. Evaluate your personal circumstances, including, but not limited to, your tax situation, allowable contribution room for a TFSA, risk tolerance, and retirement goals. Always speak with your tax professional and investment advisor when it comes to retirement and tax planning.
The chart above is for illustrative purposes only and does not indicate expected or guaranteed performance by the Fund. In no circumstances should they be considered investment advice or interpreted as predictive of the potential performance of their investment.
Assumptions for graph: $100,000 initial investment. CPM2014 Mortality table for males with MI2017 improvement scale. Tax factor breakdown for Fund: 18% Canadian Dividends, 56% ROC, 26% Income. Marginal Tax Rates: Income 44%, Capital Gains 22%, Dividends 25%. This graph includes hypothetical performance data. It was created using LifeWorks ESG data as of September 30, 2022, which includes 2,000 stochastically generated future economic scenarios showing the median case results. The results shown are purely hypothetical and do not guarantee the expected performance of the Fund. This chart does not consider all risks, fees, unique financial circumstances, or the costs of redeeming an investment in the Fund.
As of July 26, 2023. See Fund Details on RetireWithLongevity.com for the current yield
* Expected lifetime income takes the probability of being alive to receive the LPF payments into consideration using the mortality table listed in the assumptions.
*** Strengthening Retirement Income Security: Fairer Tax Rules and More Options Needed, June 2023
Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Income in the form of Fund distributions is not guaranteed, and the frequency and amount of distributions may increase or decrease. The Fund has a unique mutual fund structure. Most mutual funds redeem at their associated Net Asset Value (NAV). In contrast, redemptions in the decumulation class of the Fund (whether voluntary or at death) will occur at the lesser of NAV or the initial investment amount less any distributions received. You can always access the lesser of unpaid capital (initial value of your investment less any income payments made) or your net asset value. Fees may apply.
The Longevity Pension Fund is managed by Purpose Investments Inc. The document is not investment advice, nor is it tailored to the needs or circumstances of any investor. Talk to your investment advisor to determine if the Longevity Pension Fund is right for you, and always read the prospectus before investing. Nothing on this document shall be considered a solicitation to buy or an offer to sell, or a recommendation for a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, recommendation, purchase or sale would be unlawful under the laws of that jurisdiction. No securities commission or similar regulatory authority has reviewed this document, and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable; however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are, by their nature, based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments believe to be reasonable assumptions, Purpose Investments cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.