Annuities
An annuity is where you exchange a lump-sum for the promise of a regular series of future payments, generally from a life insurance company.
They can be bought with registered funds (RRSPs or RRIFs), a Tax Free Savings Account, or non-registered funds. Annuities bought with non-registered funds are partially taxable but you can level the yearly amount of your taxable income for your entire lifetime by buying a “prescribed annuity” instead.
You can exchange RRSP or RRIF funds for a registered annuity without any immediate income tax. You are, however, taxed on payments as you receive them from a registered annuity.
Like with RRIF payments, payments from registered annuities qualify for the Pension Income Credit and Pension Income Splitting once you reach age 65, to help you save income tax in retirement. As well, after age 65 you can use Pension Income Splitting rules to share registered annuity income with your spouse (including your common-law or same-sex partner), or your taxable amount from a non-registered annuity.
You should consider an annuity if you
- have smaller retirement savings that must last your lifetime
- want peace of mind by having regular income (for example, for core expenses once retired)
- prefer not to make ongoing investment decisions
When considering annuities, remember:
- Annuity payments may be guaranteed for a minimum number of years, or for your entire lifetime, or even for the lifetime of you and another person - like your spouse.
- An annuity is non-redeemable, and non-reversible after you sign the annuity contract, so be sure to keep an appropriate amount of funds outside to cover lump-sum expenses and unforeseen items.
- When you buy an annuity you are essentially betting that you will collect enough in the future from it to justify the initial cost. The longer you live, the more your annuity will pay.
- Annuity payments are typically calculated using long-term interest rate assumptions, and may offer the best value when such rates are high.
- Variable annuities offer payments that depend on investment returns. Some may offer guaranteed minimum payments too, for a cost.
- Annuity payments may be guaranteed by Assuris up to certain limits.*
There are three main annuity types:
Single-life annuity
A single-life annuity provides regular payments during your lifetime. You can select a guarantee period so that is you die within that initial period, your selected beneficiary or your estate can get receive the remaining value of the payments left in your guarantee period. But if you die after your guarantee period (if any) ends, your beneficiaries or estate receive nothing.
Joint and last survivor life annuity
Joint annuities make regular payments during your lifetime, and automatically continue to your spouse or common-law partner after you die. You can choose whether 100% of your original payments continue after your death, or a lesser percentage. Choosing less boosts your initial income. Similar to single life annuities, JL&LS annuities let you select a guarantee period so your estate or beneficiary can receive some value if both you and the joint person die within that initial period. Since the insurer may have to pay for a longer time period than just your lifetime, joint annuities usually pay less initially than single-life annuities.
Term certain annuity
A term certain annuity makes regular payments until you turn a certain age. If you pass away before the specified age, an equivalent to the remaining annuity payments is paid as a lump sum to your estate or beneficiary. Usually, payments are slightly lower than a life annuity, due to this guarantee.
To learn more about annuities, contact us at 604.709.5955, visit your local branch, or in your neighbourhood.