By Jonathan Chevreau National Post FP Money Friday, December 6, 2002

If you turned 69 this year, you have 25 days to do it - or else

If you are one of more than 220,000 Canadians who turned or will turn 69 in 2002, December is decision time for your RRSP.

Failure to make a decision by Tuesday, Dec. 31, could mean forfeiting almost half the value of your Registered Retirement Savings Plan to the Canada Customs and Revenue Agency (CCRA).

More viable alternatives to letting the feds de-register and tax your RRSP is to convert it into a Registered Retirement Income Fund (RRIF) or buy an annuity from an insurance company.

Both RRIFs and annuities preserve the tax-sheltering aspect of RRSPs, although as income spun off from these vehicles is withdrawn in retirement, there will be tax payable.

For this year's crop of 69-year-olds, the deadline for making a final RRSP contribution is not Feb. 28, 2003, as it is for those younger than 69, but Dec. 31, 2002. Also, all RRSP deposits must be made to the account before conversion to a RRIF. While you can convert at any time, even before 69, there's no reason to do so, says fee-only investment counsellor Adrian Mastracci, president of Vancouver-based KCM Wealth Management.

RRSPs are primarily savings vehicles, whereas RRIFs are income-withdrawal vehicles. Taken together, RRSPs and RRIFs can extend through most of an adult's lifetime, Mastracci says.

Before finalizing your decision, you should ask yourself what the most important role is for your RRSP/RRIF: capital preservation, portfolio growth or income.

For those without generous employer-sponsored registered pension plans, a RRIF may be the major investment or only form of pensionable asset available, Mastracci notes.

But if you're looking for "longevity insurance," annuities also merit consideration. An annuity is a contract that guarantees a series of payments in exchange for a lump-sum investment. You've given up your capital, in other words, and are locked in for life. If you die early, your heirs may be out of luck, unless you choose a specialized term-certain annuity not affected by your death.

RRIFs are more flexible than annuities and provide better continuity for investments held in your RRSP. They differ in two important respects, notes Gordon Pape in his 2003 Buyer's Guide to RRSPs.

First, you cannot make new contributions to a RRIF. Any additional money can only come from other registered plans. Second, you must make minimum annual withdrawals from a RRIF, according to a formula set by the federal government.

All minimum RRIF withdrawals are fully taxable as regular income. This aspect can irk retirees who have other sources of income and are forced to withdraw and pay tax on RRIF income they don't necessarily need yet. That's the flip side of the tax break you got all those years by making RRSP contributions.

RRIF withdrawals must begin no later than the calendar year following the date the plan is set up. So if you set one up in 2002, the first withdrawal commences in 2003. Assuming you want to maximize tax-sheltered growth, you'd elect to start the withdrawal at the end of 2003.

Since 1993, the minimum annual RRIF withdrawal at age 69 has been 4.76%. This rises each year, hitting 8.75% at 80, 10.3% at 85 and 13.6% at 90. At 94, the minimum withdrawal reaches 20%, and stays at that level thereafter.

Relying solely on RRIF income to live may be "financially devastating" once you're in your 90s, Pape warns. Therefore, he says, "don't put all your retirement eggs in the RRIF basket." Some time in your late 80s, you can convert part or all of your RRIF's capital to a life annuity, which "will ensure regular income for as long as you live."

Annuities are in effect fixed income, and locking in at today's low interest rates may be unattractive. That's compounded by the fact converting an RRSP to an annuity is an irrevocable decision. If you turn all your RRSP's capital into an annuity at 69, you can't change your mind.

The nice thing about switching an RRSP to a RRIF is you can always decide later to move to an annuity. By delaying the annuity decision to age 80, you could convert a larger chunk of principal, hopefully at higher interest rates.

Except for extenuating circumstances, "it makes very little sense for males under the age of 75 or females under the age of 80 to purchase life annuities to annuitize any additional non-pension wealth," says York University finance professor and author Moshe Milevsky. The exceptions are if interest rates are very high -- not the case today -- or if you believe you are much healthier than most and likely to live a long time.

Once in your mid- to late-80s, Milevsky becomes a fan of annuities, by which time the return from annuities may be triple that of interest paid by bonds: i.e., closer to 9% than 3%. But converting to annuities at age 69 would be "way too early," Milevsky says.

Mastracci says the main choice is between a life annuity and a term-to-90 annuity. But Milevsky is also keen on a new generation of variable payout annuities that avoid locking in at current interest rates and provide for income growth over time. He has just released a report on these products.

As variable payout annuity (VPA) products become more established in Canada (with reduced insurance fees and a broader range of asset mixes), Milevsky says an argument can be made for annuitizing earlier than age 80.

"However, I still believe the ideal payout annuity product, which still does not exist in Canada, would be to take a small fraction of your RRSP at age 69, and purchase a pure deferred annuity that would start paying if and only if you ever reach age 85. The remainder of the money, at age 69, would be converted to a RRIF."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.