Annuities

Annuities pay a specified amount, at a specified frequency over a specified period of time. That period can be ‘fixed’ (eg. 10 years) or ‘Life’ (guaranteed to be paid for as long as you live). They create a regular ‘income stream’ for (you) the annuitant over a period of time from a large ‘lump’ of cash that you have received from a matured RRSP or investment. Annuities are either ‘registered’ (funded by money from a RRSP) or ‘unregistered’ (funded by after-tax money from any source).

The income stream from a ‘life’ annuity is guaranteed by the insurance company (only insurance companies can provide annuities) to last the rest of the annuitant’s life, even if he or she should live much longer than originally expected. Life annuities can be either ‘single-life’ annuities or ‘life annuities with a guaranteed term’. With a ‘single-life’, should the annuitant die sooner than expected, the payments will cease and there is no further value in the plan. However, you can choose to put your money into a plan that will guarantee a certain fixed period of payments – paid out to your beneficiaries even if you die before that period has ended. For example, a “Life Annuity – Term Certain 10 Years” plan means if you die after 5 years of payments, the plan will continue to pay out for another 5 years to your beneficiaries. This is called a ‘life annuity with guaranteed term’.

For retirement purposes, the annuity will allow you to spread out your taxable RRSP income over your lifetime. Remember, a potential disadvantage is that the return on the investment is ‘fixed’ on the date that you purchase the plan and does not change. The advantage of course is that you are assured of receiving a guaranteed income for the rest of your life regardless of what happens in the market.

The downside is annuity pay-out rates are impacted by meagre interest rates and are much lower than historical norms. However, annuity pay-out rates increase with age so, these days, it’s better to wait to buy an annuity until your mid-to-late 70s.  The upside is an annuity’s guarantee of reliable cash flow for life giving you the opportunity to up the equity in your remaining portfolio to try for a little more return.