What is an annuity?
An annuity is a contract with a life insurance company. You provide them with a lump-sum payment from your defined contribution pension plan, RRSP, RRIF, LIF, LRIF, prescribed RRIF (PRRIF), deferred profit sharing plan (DPSP), or non-registered savings.
In return, you receive a guaranteed income stream (like a pension) payable for a specified period or as long as you live. Depending on the type of annuity you choose, the payments may continue to your spouse or other beneficiary after your death.
Why buy an annuity in retirement?
It’s well-known that Canadians are living longer. The latest report from Statistics CanadaOpens a new website in a new window released in 2019, found that the average life expectancy in Canada is 79.9 years for men and 84 years for women.
This makes it important to set up a part of your nest egg in a way that can give you guaranteed cash flow for the rest of your life.
Guarantee retirement income with an annuity
Building a part of your retirement nest egg with an income annuity can help you cover most of your basic living expenses in retirement. Then the other part of your money can be invested in funds that have the chance to grow.
The amount of money used to buy the annuity
The more money you convert, the larger your income will be. For example, $500,000 will buy you a much larger annuity than $100,000.
The actual monthly income you receive from your annuity will depend on several factors.
Generally speaking, the older you are when you start to receive your annuity, the higher your annuity income will be. Younger retirees receive less annuity income each month because they’re expected to live longer.
The type of annuity you purchase
Different annuities offer different features. Some features are quite valuable and, in exchange, result in a lower monthly income.
Interest rates when you convert your savings
Typically, the interest rate used at the time of conversion is fixed for the lifetime of your annuity payments. If interest rates are low, your income will be lower than you might hope. If interest rates are high when you make the purchase, the annuity income will be higher. Once the annuity is purchased, the payments are fixed and the contract usually can’t be cancelled or changed.
Payments from annuities purchased with funds from a registered plan are 100% taxable, while only a portion of those purchased with non-registered funds is taxable.
Is an annuity for you?
An annuity is a great choice to get a steady income during retirement for these reasons:
- They can give you excellent value even in low interest rate environments.
- They provide an expected cash flow with no income fluctuation regardless of whether markets are up or down.
- They can help to continue to provide income in the event of the death of a spouse.
- They protect against outliving your savings.