The UK Government has embarked on a major reform of the pension regulatory environment. Prior to this, the UK‘s policy was to encourage pension saving by giving tax breaks to regulated pension savings schemes, as a quid pro quo, but demand that the retiree use the money saved to support themselves through to death.
This was to be achieved either via an annuity or via a drawdown product, with the drawdown amounts limited to a level comparable to the annuity rate. These rules were designed to prevent the retiree outliving their savings, ensuring no state involvement in the support of these pensioners, other than in extreme circumstances.
The policy was well accepted initially but poor annuity returns in recent years, primarily driven by the low interest environment and increasing longevity, made retirees extremely unhappy with being forced to purchase these products. So last year, the government decided to allow all retirees make their own decisions on what to do with their lifetime savings.
Contrast the position in Canada. The Canadian Government gives similar tax breaks and allows complete withdrawal of the money on day one of retirement. It also allows the purchase of annuities although these suffer the same issue from global-wide low interest rates as they do in the UK.
The majority of money however ends up in Registered Retirement Income Funds (RRIFs), a product broadly similar to the drawdown model in the UK whereby ones funds can remain invested and one can take a regular income from them. The major difference between the two is the Canadian approach of insisting that the funds be drawn down by set minimum amounts each year.
This may have made sense when the schemes were first introduced but with increasing longevity, it appears that the Canadian government is now in danger of forcing the pensioners to run the ever-increasing risk of outliving their money. The rate of forced depletion is dangerous given that ever-greater numbers are living into their late 80s or early 90s.
Given increasing longevity, the minimum withdrawal rules are anachronistic and should be scrapped. Canada should be encouraging those who save to provide for their own future rather than forcing them to deplete their funds at a stated rate and run the risk of having to fall back on government support. This policy also gives those who are in the latter stage of retirement a new concern; alongside their health worries they now have to worry about a yearly report showing how their resources are dwindling, without being able to do much about it. Of course they can start saving the money they are forced to withdraw in TFSAs but this is increasing complexity for those at a vulnerable stage of their lives.
The Federal Government isn’t in desperate need of the tax due on these funds; it can wait until the fund owners have passed away. Canada should scrap the minimum withdrawal amounts associated with RRIFs and give the prudent the ability to manage their own money better.
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