Choosing The Best Type of Annuity For You

By Ivon T Hughes
good vs bad

Get The Highest Paying Annuity

As the stock markets continue to rock 'n' roll your money, the more a guaranteed annuity beckons. If you remember the 2008 financial crisis, then you know how important it is to have a regular source of income, whether it is a salary, an allowance, company pension or other. Never let yourself be blindsided when considering guaranteed income.

Annuities are among the most valuable financial products on the market today. But as most salesmen prefer to keep control of the money, annuities are rarely, if ever, discussed with the client.

In order to choose the correct annuity, knowing the kinds of annuity available to you to purchase is very vital. There are different types of annuity, each providing different levels of income for you and possibly your dependants. The level of income offered by a particular type of annuity will depend on the life insurance company you choose.

Funding Sources

To understand how annuities are bought and used in Canada, it’s first necessary to understand the different types of funding under Canadian law. Broadly speaking, Canadians can purchase annuities using either registered funds or non-registered funds.

  • Registered Funds:
  • Registered funds generally originate from registered retirement savings plans (RRSP’s) which is an arrangement between you and a carrier (an insurance company, a trust company or a bank) that is registered with the Canada Revenue Agency. You transfer money to the insurance company from a registered retirement savings plan (RRSP), a registered pension plan (RPP), a specified pension plan (SPP), or from a RRIF, LIRA and other registered plans.

  • Non-Registered Funds:
  • You can also purchase annuities with non-registered funds. You can use any money that is not already in an RRSP, RPP, SPP, RRIF, or other registered plan, for example cash savings. If you use non-registered funds, you will receive a higher non taxable income than you would with registered funds as your payments will only be partially taxable. That’s because when you use non-registered funds, you've already paid tax on the money you used to buy the annuity. Once the pay-out period begins, non-registered annuities that meet certain criteria are taxed via the prescribed method of taxation.

Whether you choose a registered life annuity where all the income is taxable or its counterpart, a non-registered life annuity or both, you can be 100% certain that you cannot outlive the income. And neither can your spouse or partner if included as a joint annuitant.

To get an idea about how much income you may be able to qualify for, use our annuity calculator.

What kinds of annuities can you buy with the different fund types?

There are different types of registered and non-registered sources of funds than can be used to buy an annuity in Canada.

shopping cart of types of funds
Premium/Funding Source Type of annuity
that can be purchased
guarantee period
for annuity income
Locked-in RRSP Life annuity
Joint life annuity
Min = 0 years
Max = lesser of, to age 90 of
younger spouse, or 40 years
LIRA Life annuity
Joint life annuity
Term certain annuity
Min = 0 years
Max = lesser of, to age 90 of younger spouse, or 40 years
Must be to age 90 of the annuitant, or the younger spouse.
Non Locked-in Life annuity
Joint life annuity
Term certain annuity
Min = 0
Max = 40 years or age 115
Min = 3 years
Max = 40 years or age 115
RRSP Life annuity
Joint life annuity
Min = 0
Max = 15 years
Non-registered Life annuity
Joint life annuity
Min = 0
Max = 15 years
Locked-in RPP Life annuityJoint life annuity Min = 0
Max = 15 years
Non locked-in Life annuity
Joint life annuity
Term certain annuity
Min = 0
Max = to age 90 of younger spouse
Must be to age 90 of the annuitant, or the younger spouse.

Types of Life Annuities in Canada

There are different types of annuities available in Canada. Each type of annuity will have a different monthly income depending on guaranteed periods.

In Canada, single and joint life annuities, with or without a guaranteed period remain by far, the most popular of all annuities purchased.

  • Single Life Annuities
  • A single life annuity provides an income as long as the owner, or annuitant, is living. When the annuitant dies, the income stops, unless the owner has opted to have a minimum guarantee period, which guarantees that the income will continue for a minimum number of years from the time the income starts.

  • Joint Life Annuities
  • A joint life annuity provides you with regular income payments for your lifetime and for that of your spouse, partner or other person you select.

Some Factors To Consider When Buying An Annuity

  • With registered funds, the life annuitants must be spouses, but not with non-registered funds.
  • Payments may reduce on either death.
  • Neither annuitant can outlive the payments.
  • The guaranteed period may be for any term from zero to 40 years for non-registered funds and up to age 90 for the youngest annuitant in a registered annuity.
  • Non-registered annuities are used to provide guaranteed income, especially where there is no company or other pension being paid.
  • If the beneficiary is not the spouse of the annuitant in a registered annuity, any remaining payments must be commuted.
  • Payments in any registered annuity may continue for the balance of any remaining guarantee period to a qualified recipient such as a spouse.

Term Certain Annuities

A term certain annuity provides income payments for a certain period of years. The payments are made whether the annuitant lives to receive them or not. The minimum term for a term certain annuity varies with each company. The maximum term is 40 years. The purchase price is entirely independent of age. For registered funds, annuity payments must be guaranteed to age 90, minus the age of the annuitant.

Term Certain Annuity for a Child

Where a beneficiary of an RRSP is under age 18 and still a child at law an annuity can be purchased for him or her. The child is responsible for any tax payable on income from the annuity and the tax can be spread evenly over the time between the annuity’s purchase date and the day before the child’s 19th birthday.

Instalment Refund Life Annuity

This option guarantees that if payments have started and the annuitant dies before receiving payments equalling the minimal premium paid, payments will continue to the beneficiary until the total amount of payments received equals the original premium. This feature is only available for single life annuities purchased with non-registered funds, and only available from certain companies.

Indexed Annuity

An indexed annuity provides for annual increases in income to help offset the effects of inflation. Under this option, income payments increase on each policy anniversary by a fixed amount, such as 3 percent per year.

Indexing is available for single life and joint life annuities, with or without a guaranteed period, and is available for both registered and non-registered annuities.

Impaired Life Annuity

Occasionally referred to as “medically underwritten annuities,” impaired life annuities are custom annuities written for those with a shorter life expectancy than the average person. They are also referred to as “enhanced annuities.” Because a person in poor health has a shorter life expectancy, an impaired life annuity may be able to provide a higher monthly pay-out than a conventionally underwritten annuity.

An imapired an annuity is also the most ignored of annuities by the general public as it is unknown and not discussed in everday media

If one partner or the sole annuitant has a shorter life expectancy, it just makes a lot of sense to obtain a quote that improves the income. Perhaps it may not be much, but if you leave a partner behind, it will also help them of course.

The procedure is simple. You make the annuity application and, at the same time, file a short medical report from your attending doctor. The report should include remarks on the illness, relevant dates and current treatment. With the report the company medical team will come to a decision or may ask for further details. Whatever the decision, it makes good sense to get the best return on your capital. Haven't you been doing that all your life?

To begin the process get an impaired annuity quote.

Integrated Life Annuity

Clients who wish to retire early can bridge the income gap between the time of their early retirement and the time they begin to receive benefits from their Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) -- which is normally age 65 -- by purchasing an annuity whereby at age 65, the income payments will decrease at the time of purchase, resulting in a level income.

If the level of the pension increases before the annuitant reaches age 65, the annuity will not reduce the higher government benefit. An annuity purchased with registered funds may only be integrated with the OAS benefit.

Cash Refund Life Annuity

This option guarantees a beneficiary will receive a lump sum equal to the difference between the original premium paid and the total payments received.

Guarantee Options for Life Annuities

  • Return of Premium Guarantee
  • This option can guarantee a return of the original premium if the annuitant(s) dies before the first payment date. This option is often available if the payment start date is deferred.

  • Single Life Annuity
  • The original premium will be returned to the named beneficiary if the annuitant dies before the payment start date. Single life annuities provide the highest income, all things being equal, but income ceases upon the death of annuitant.

  • Joint and Survivor Annuity
  • If registered funds are used and the primary annuitant dies before the payment start date, then the premium will be refunded to the joint annuitant. If non-registered funds are used, the premium will be refunded if both annuitants die before the payment start date.

  • Guarantee Period
  • If a guarantee period is chosen, payments are guaranteed to be paid for the selected period as well as for life. If the last surviving annuitant dies before the end of the guarantee period, then payments will be made to the named beneficiary in the case of non-registered funds.

  • Commuted Value
  • If, after the death of the annuitant, any guaranteed payments remain, the named beneficiary may choose to continue to receive the payments or to take a lump sum payment. If the funds are registered and the named beneficiary is not the spouse of the annuitant at the time of death, any remaining income payments must be commuted to a lump sum. Payments may continue if the amount is non-registered.

Annuity Income Factors

  • Annuity type and Options:
  • The type of life annuity and any guarantees you choose. For example a single life annuity generally provides greater annuity payments than a joint life annuity.

  • Guarantee Period:
    • The longer the guarantee period, the lower the income amount.
    • Maximum age is to 90 for registered funds; to 115 for non-registered funds.
  • Premium Amount:
  • The larger the premium, the greater the income payment.

  • Source of funds used
  • If you use non-registered funds, you will receive a higher income than you would with registered funds as your payments will only be partially taxable.

  • Income Deferral:
  • The period of time between the "Purchase Date" and the "Income Start Date". The longer you defer your income the higher your payments will be as more interest is earned on your capital.

  • Pay-out Options:
    • Level – payment amount remains the same throughout the payment period.
    • Indexed – yearly income increases by the agreed amouont.
    • Reducing – when the annuitant dies, the income is reduced by a previously agreed amount.
    • Integrated – you can blend your income with your government pension of CPP, QPP or OAS.

Applying your knowledge

Now that you’ve educated yourself about annuities and their vital role in providing income, the next step is to apply your knowledge to your personal situation. The way to do that is to schedule a consultation with an experienced licensed annuity broker. Your annuity professional is a licensed expert on the annuity products available and how they work

The annuity expert will make some recommendations and direct your attention to some specific ideas, but the final decision is, of course, yours to make.

What to do now

So your next step, at this point, is to complete our annuity quote form. If you prefer, you can also call us at 1-877-842-3863.

Ivon T Hughes

About the Author

Ivon T. Hughes

Ivon T Hughes is a leading expert in life annuities in Canada. His website is a recognized authority on annuities. He's also an established insurance and investment broker, through The Hughes Trustco Group since 1972. Recently, he's been redefining how annuities are sold in Canada.


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