ANNUITY Q&A

What you need to know about Annuities, and how you can make the right decision for your retirement.

A lot of budget-conscious seniors plan for their retirement by saving up enough for the average life expectancy. The reality is that no one can know how long they’ll actually live, and relying only on your savings to provide for you in your retirement risks having no money at the end of your life.

Retirement is meant to be lived in comfort, and managing your money in fear of living too long to enjoy it is something you should plan to avoid.

An annuity is a contract between an annuity provider and an applicant, where the applicant pays a lump sum to the provider, and in return receives a regular income for either a specified period of time or for a lifetime. How much you receive from your provider depends on a number of factors:

  • The amount invested in your annuity.
  • The type of annuity you buy.
  • Current interest rates in Canada.
  • Your age and gender.
  • The current rate of Canadian long-term bonds.
  • The expenses and assessment determined by your annuity provider.

The amount your provider will pay you varies widely depending on how the annuity provider calculates the yield of your investment, and how they assess your personal circumstances. It’s been determined that the income differences between various annuity providers in Canada can vary as much as 20%.

For this reason, it’s imperative you consider what all annuity providers can offer you, and search the market to find the best possible return on your investment. By working with all annuity providers, you can get the highest possible income from the amount you invest.

In Canada, annuities are considered a safe and reliable investment. While in the United States, annuitants have seen approximately 85% to 90% of their income returned during their lifetimes, recent drops in Canadian bond rates have seen Canadians annuities provide as much as 105% of their original investment as income, making them a safe and effective way to budget your savings into retirement.

Annuities pay be purchased with a guarantee period. This is a period in which your annuity will continue to be paid in the event that you should die during the length of the contract. These payments will then be paid to your beneficiary as a benefit. Both Term Certain and Life Annuities may be purchased with guarantee periods at various lengths.

Annuities funded with pension or RRSP/RRIF funds are known as Registered Fund Annuities. Registered fund annuities provide an income that is taxed normally. Most RRSP/RRIF plans contain the option to convert to an annuity, though keep in mind your bank cannot sell you an annuity.

Using funds other than RRSP/RRIF or Pension funds to invest in an annuity is known as Non-Registered Fund Annuities. When you purchase an annuity with non-registered funds, you have the option of having your annuity be Prescribed or Non-Prescribed. These options determine how your annuity income is taxed.

If you’re planning to retire and want to avoid the risk of outliving your savings, or you want the peace of mind of having a regular income that you can depend on: an annuity is one of the safest retirement plans available. By providing yourself with income for life, you can ensure that an annuity is one of the few parts of your retirement that gets better as you age.