The fees charged by Manulife IncomePlus and the MER of the mutual funds available in the program total roughly 3.5%. Since an investor withdrawing the guaranteed annual income of 5% will have the withdrawal balance reduced by the same amount, she has to earn an average annual return of at least 8.5% per year to reset the annual income stream at a higher level. At a time of low interest rates and modest return expectations, it is highly unlikely that annuitants will collect an annual income that is greater than the initial guarantee.
How does IncomePlus stack up against a portfolio invested in bonds? In the following spreadsheet [also available here], I’ve made some assumptions: IncomePlus provides an income stream of 5% of the initial portfolio value and the entire income is not taxable. The bond portfolio yields 4% and is taxed at a 25% rate and to make up for the shortfall, a tiny portion of the capital is consumed. How long would the bond portfolio provide an income stream equivalent to IncomePlus before running out of capital? Try 30 years. Admittedly, an IncomePlus annuitant who lives longer than 30 years will still have an income stream, albeit one that has been severely ravaged by inflation but is it a much better outcome than a portfolio invested entirely in bonds?