Seniors, financial advisers echo concerns about ‘outdated’ rules mandating RRSP withdrawals

B.C. senior Lorraine Logan, 69, is among those worried that existing federal retirement savings withdrawal rules will force retirees to deplete their pension funds too soon.

Her fear is echoed by a national think-tank that called Wednesday for reforms to the “outdated” rules for minimum withdrawals that it says could leave seniors like Logan at risk of outliving their savings.

Current rules require seniors to withdraw about seven per cent of their entire Registered Retirement Income Fund at age 71, with that figure slowly rising to about double that percentage over 20 years. After age 91, the required percentage rises sharply until it reaches 20 per cent for those 94 and older.

“Now you’ve got people working longer and retiring when they are 70 and all of a sudden at 71, you’ve got to put it in a RRIF and you must take money out,” Logan said, adding that many seniors took a hit with their personal investments in 2008 and have had to extend their work lives.

“If I live to my grandma’s age of 104, I’m going to be on welfare. I do think this needs another look.”

The C.D. Howe Institute report said the withdrawal rules were instituted in 1992 when the government was dealing with a debt crisis and looking for ways to keep tax revenues flowing into the treasury.

“In 1992 the federal government was deficit-ridden and hungry for cash,” according to the study. “Now it is close to surplus, and the timing of receipt of those taxes matters less to the government.”

The policy must be altered because longer lifespans and diminished rates of return on fixed-income investments have dramatically changed the landscape. For Canadians who have or are about to convert their Registered Retirement Savings Plan nest egg into a RRIF, the minimum withdrawal roles pose a threat, the authors argued.

“They oblige the holder to run tax-deferred assets down rapidly,” the report stated.

“RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.”

Logan, the president of the Council of Senior Citizens Organizations of B.C., said she would prefer to wait until age 75 before withdrawing pension funds. “Once you take it out, it becomes cash flow,” she said. “I just think for me, it’s coming very, very quickly.”

Since 1992, the Income Tax Act requires RRSP holders to convert their savings into either an annuity, purchased through insurance companies, or a RRIF. Both result in regular payments expected to last until death.

Current RRIF rules require that the retiree withdraw 7.38 per cent of their entire RIF at age 71, with that figure slowly rising to about double that percentage over 20 years. After age 91 the required percentage rises sharply, from 14.73 per cent to 16.12 per cent, then 17.92 per cent, and finally 20 per cent for age 94 and above.

In 1992 (when the withdrawal had to begin at age 69) it was assumed that the average 71-year-old man would live to a little over 82, while a woman would live past age 85. But the current life expectancy has men living until past 85, and women 88.

The Vancouver Sun