The best pension nobody uses

Millions of Canadians are worried they won’t have enough income in retirement. Therein lies one huge opportunity for advisors. Here’s how

The best pension nobody uses
Manulife recently released data on its Investor Sentiment Index and not surprisingly Canadians are worried about their retirement income. But for advisors, the deft use of two simple products in tandem can address many of these client concerns.
 
Of course, we’re talking about back-to-back annuities, the process whereby an annuity is bought alongside traditional life insurance, ensuring the client generates greater income in their retirement.
 
It’s not a new concept by any means but it’s one that many advisors are avoiding to the possible detriment of the clients. Especially vexing is why.
 
Veteran Oakville-based advisor Rino Racanelli sees three reasons clients and advisors shy away from annuities, the backbone of the back-to-back annuities plan.
 
“Annuities never get media attention. You never hear about this annuity paying this much; you’ll never hear that,” Racanelli told LHP. “They’re [consumers] thinking about investing in ETFs, mutual funds, stocks and bonds, because this is the kind of information they’re getting.”
 
“When was the last time you turned on the television and they were taking about an annuity? Never. It’s just not sexy enough,” he added.
 
That takes care of the client. But what about the advisor?
 
“Commissions might have something to do with it. If you’re an investment advisor holding a portfolio of $20 million or $30 million you’re getting good trailers on that. That’s giving you an income,” said Racanelli. “An annuity is just going to pay you a one-time first-year sales commission and that’s it. No trailers – so you’re going to make less money if you sell an annuity. That could be holding an advisor back.”
 
But forget compensation for a moment. Advisors just don’t know enough about them. You can’t do what you don’t know.
 
Most importantly, here’s why advisors might want to reconsider them.
 
 “An annuity is paying anywhere from 5% to 6% guaranteed rate of return for the rest of your life. That’s a return of principal and interest. If you’re buying a GIC today you’ll get about 1.8% on a five-year GIC, which is ridiculous,” said Racanelli. “They [seniors] are not making any money on the interest rate so they’re shoving it into the market. Lately, we’ve seen what happens to the markets. I’ve had clients lose 12% in the last three months. If you’re a senior you can’t afford to lose 12% because it’s going to take you maybe four or five years to recoup that.”
 
Although Racanelli’s a big fan, he believes annuities should represent no more than 25% of a client’s entire financial plan.
 
“It’s the best insurance plan out there for people in retirement,” he said.
 

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