Canadians are living longer but not necessarily saving enough for retirement. In fact, more seniors are working part-time jobs just to supplement their incomes and make ends meet. If you’re unable to qualify for a whole life insurance policy or don’t have an employer-based pension plan to help fund your retirement, purchasing an annuity might be the right post-retirement solution for you.

What is an Annuity?

An annuity is a contract between you—the annuitant— and a life insurance company that allows you to convert some of your retirement savings from non-registered money such as group retirement or savings plans or from a RRSP, RRIF, or TFSA into guaranteed periodic income depending on the type of annuity you choose. Annuities are designed to help you with retirement income planning, especially if you’re concerned about possibly outliving your retirement savings.

How Annuities Work

You can purchase the annuity ahead of time during your working years and make payments gradually or you can purchase an annuity with a lump sum payment. Depending on how and when you pay for an annuity, you can defer payments until retirement (deferred annuity) or start receiving payments right away (immediate annuity).

The amount of income you receive from an annuity is contingent on several factors:

  • The amount of your initial deposit
  • Long-term interest rates
  • Your age (life expectancy based on projection of how long you may still yet live)
  • Your health (life expectancy based on your whether it is good or poor. If in poor health you may be able to qualify for an impaired risk annuity)
  • The length of time payments is guaranteed for
  • The type of annuity you choose (single life versus a joint annuity)

Benefits of Annuities 

While some annuities pay you an income for fixed period such as a term certain annuity, other annuities, such as a life annuity, will pay you a guaranteed income for as long as you are living. If you pass away within the guaranteed period, income payments for a remainder of the period or a lump sum may be paid to your beneficiary or to your estate.

Another benefit of an annuity is it removes the stress of having to manage your own investments to produce a retirement income. A life annuity will continue to provide you a guaranteed set income despite interest rates and whether investment markets fluctuate and decline in value.

An annuity can also be a solution for you if you don’t have permanent life insurance that will provide your spouse with a death benefit, but you want to ensure your spouse still has a fixed income in case you pass away. A joint annuity is a policy with two annuitants set up on the contract that allows you to pass on your guaranteed income payments to your surviving, living spouse. This type of annuity is also known as a last survivor annuity.

A prescribed annuity, which is only available to individuals and not corporations, provides the annuitant with special tax treatment on the interest income by spreading it out evenly over the life of annuitant, more or less allowing it to remain level. The return on capital is not taxed. An annuity where the interest income is taxable, but not the return on capital, is known as a non-prescribed annuity.

Though the concept of an annuity is fairly, straight-forward, given the complexity of annuity products available on the market today, it is advisable to speak with one of our licensed life insurance brokers about which annuity options will be best suited for you.

An annuity is a solution if you’re….

  • Wanting to leave savings to your spouse
  • Worried about possibly outliving your retirement savings
  • Seeking to address short-term/long-term income needs
  • Needing a way cover fixed income expenses in retirement
  • Eliminating the need for making ongoing risky investment decisions and dealing with unstable market fluctuations
  • Wanting to allow investments to grow tax-free for a determined period
  • Wanting to cover tuition payments for child or grandchild
  • Diversification of investment portfolios

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