As fewer Canadians receive workplace pensions, advisors can provide other options for steady retirement income.ChayTee/iStockPhoto / Getty Images
This article is part of a new Globe Advisor series, Pensions Unpacked, exploring how workplace pensions fit into retirement strategies, and the technical details and decisions that come with the plans.
With the majority of Canadians unable to rely on a workplace pension to fund their retirement, advisors are being tasked increasingly with creating pension-like incomes for clients in their retirement.
Just 37.5 per cent of workers were covered by a registered pension plan in 2022, according to Statistics Canada data released in 2024, part of a 20-year decrease in workplace pension coverage.
“People want to just have a certain amount of certainty,” says Darren Coleman, senior portfolio manager with Coleman Wealth at Raymond James Ltd. in Oakville, Ont.
“One of the great things with [defined-benefit] pensions is people began with a framework of, ‘Here’s what I’m going to get, and then I’ll figure out my life accordingly.’ When people don’t have that visibility of what their income’s going to be, they have no idea what to expect,” he says.
Here are some options for retirees who don’t have a pension but are looking for greater income stability.
1. Return of the tontine
Purpose Investments Inc. brought the tontine back into the mainstream when it launched Longevity Pension Fund in 2021. Retirees invest a set amount, which is pooled with other participants’ assets, in exchange for a monthly income that can vary depending on the fund’s investment performance and actuarial assumptions about how long pool participants will live.
The monthly payments are designed to increase gradually as retirees age to account for inflation and possible care needs. While unpaid capital is returned to the participant if they choose to exit the fund, or to their estate if they die, the investment growth on their assets remains in the fund.
Guardian Capital LP followed in 2022 with the launch of GuardPath Modern Tontine 2042 Trust and GuardPath Managed Decumulation 2042 Fund. However, the firm announced in early January that both funds will be terminated effective on or about March 28.
Fraser Stark, head of portfolio solutions and strategy at Purpose Investments, and president of the company’s longevity retirement platform, says he sees the longevity product as an “additional layer” of retirement income on top of Canada Pension Plan and Old Age Security payments, with the risk of varying payments perhaps offset by the greater certainty of an annuity.
How much someone should invest in the fund depends on how much they hope to leave behind for their beneficiaries, he says. Purpose Investments tends to see clients invest roughly one-third of their total portfolio into the longevity fund.
Mr. Coleman says retirees need a mix of products or strategies to achieve a reliable monthly income and continued growth in their investments to support them into their later years. He notes that over a 30-year period, inflation will roughly triple the cost of living, so investing in guaranteed income products such as annuities alone won’t be enough.
“That’ll provide a certainty of dollar income, but not purchasing power income,” he says.
2. Segregated funds
Jeffrey Wu, a certified financial planner and president of Unison Financial Solutions Inc. at Sun Life Financial Investment Services (Canada) Inc. in Montreal, says he likes Guardian’s funds for clients who are open to taking on a bit more risk in exchange for a higher potential income.
However, he says guaranteed-income segregated funds have been particularly popular with clients in recent years even though they’re starting to lose their shine amid lowering interest rates.
Mr. Wu acknowledged these funds have “pretty high” management expense ratios and no inflation protection, but says the guarantee of monthly income resonates with more conservative clients. He also notes that investing in a seg fund can be more beneficial than annuities for clients who want to leave some funds to their beneficiaries.
3. Individual pension plans
Mr. Coleman is a “big fan” of individual pension plans for business owners but says they’ve become underutilized as accountants began to advise entrepreneurs to take their compensation as dividends rather than salary.
IPPs require participants to have T4 salary income that can generate registered retirement savings plan contribution room every year. The pensions allow for much higher contributions than RRSPs. Once they’re set up, the plans are assessed every three years and contributions are adjusted based on the assets’ market performance.
He says an IPP is appropriate when a client has sufficient free cash flow to double their RRSP contributions – and the desire to do so.
“If you’re in your mid-50s, … [an IPP is] like getting in the DeLorean and you can play catch-up on those higher contribution limits,” he says, adding that an IPP is “sophisticated, a bit complicated, but also enormously powerful.”
4. Tapping into home equity
Brandon Chapman, certified financial planner and principal at SaaS Wealth Insurance in Vancouver, says he’s starting to see reverse mortgages being recommended more heavily as a way for retirees to access a reliable monthly income.
Reverse mortgages allow homeowners to take out up to 55 per cent of the value of their home as a non-callable loan and can be paid out as one lump sum or in monthly amounts.
The use of reverse mortgages has climbed in recent years, with more than $8.2-billion in reverse mortgage debt outstanding at the end of June, 2024 – up 18.3 per cent from the same month in 2023, and 39.3 per cent from 2022, according to data from the Office of the Superintendent of Financial Institutions.
Mr. Chapman says he generally advises against the arrangements, given their high interest rate and because the home will typically be sold after the client’s passing to pay off the debt.
“For families that want to keep their property in the family, it’s a terrible choice,” he says.
He typically recommends clients who want to tap into their home equity in retirement set up a home equity line of credit before they retire, but clarifies that a HELOC should be considered as a fallback option for retirement income well after tapping tax-sheltered and taxable investments.