Annuities are a popular investment vehicle in Canada that provides a guaranteed stream of income to retirees. With the aging population and an increasing interest rate environment, many Canadians have questions about annuities. In this blog post, we will answer the top 10 questions about annuities in Canada.
1. What is an annuity?
An annuity is a financial product available in Canada that provides a guaranteed stream of income to an investor in exchange for a series of payments. The income payments are usually made on a monthly, quarterly or annual basis and can continue for the life of the annuitant or for a specific period of time (e.g. 10 year term certain annuity pays out for 10 years only). Annuities can also be owned on a joint basis where there are two annuitants and payments are made to the last survivor.
There are several different types of annuities available in Canada, including:
2. Who can buy an annuity?
Anyone can buy an annuity in Canada, but they are typically purchased by retirees or those nearing retirement age who are looking for a guaranteed stream of income. Annuities are also sometimes purchase for children by parents to ensure that their parents receive guarantee income for life in the event of the passing of the parents.
Applicants must be in Canada at the time of signing the application paperwork.
3. What are the different types of annuities?
Life annuities: These provide a guaranteed stream of income for the life of the annuitant.
Term-certain annuities: These provide a guaranteed stream of income for a specified period of time.
Joint and survivor annuities: These provide a guaranteed stream of income for the life of two individuals, typically a couple.
Deferred annuities: These allow investors to accumulate funds over a period of time before converting them into an income stream.
4. How are annuity payments calculated?
The amount of income an annuitant receives is determined by several factors, including the annuitant’s age, gender and life expectancy. Annuity rates are also influenced by current interest rates (short and long term interest rates), investment returns, the annuity provider’s expenses and mortality rates.
5. What are the tax implications of annuities?
Annuities are taxed as income and the amount of tax owed depends on the annuitant’s tax bracket. If the annuity is purchased with funds from a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), the income is taxable when received and the full amount is taxable as income. However, if the annuity is purchased with non-registered funds, a portion of the income received may be tax-free as only a portion of the annuity payment is taxable as income.
6. Can annuities be customized?
Yes, annuities can be customized to meet an investor’s specific needs. For example, an annuitant can choose the frequency and duration of income payments, as well as the type of annuity (life, term-certain, etc.), indexing the payments for inflation, adding guarantee periods, return of premium, etc.
7. What happens to the annuity payments if the annuitant dies?
The answer to this question depends on the type of annuity purchased. If the annuity is a life annuity, the income payments cease upon the annuitant’s death. However, if the annuity is a joint and survivor annuity, the income payments continue for the life of the surviving annuitant.
The annuity may also have guarantee periods which means that the insurance company has to provide a certain amount of years of payments, regardless if the annuitant passes away before the end of the guaranteed period. For example, if you have a single life annuity with a 10 year guarantee period and the annuitant passes away in year 7, the insurance company is still required to pay out the remaining 3 years of payments to ensure that the 10 year guarantee period has been met. If the annuitant lives beyond 10 years, the insurance company will keep paying the annuity payments until the death of the annuitant.
8. Are annuities guaranteed by the Government?
No, annuities are not guaranteed by the government. However, annuities are backed by the insurance company that issued them. There is also a company called Assuris which provides coverage in the event that the insurance company becomes insolvent. Up to $2,000 per month for annuities are 100% covered by Assuris in the event of insolvency by the insurance provider.
9. What does it cost to buy an annuity?
There is no cost to purchase an annuity. You will have to work with a licensed life insurance agent in Canada who is licensed to be able to sell annuity products. You will also want to make sure that you are dealing with a broker who is able to quote all of the available insurance companies so that you can compare the different payout rates and products.
The broker is paid a one-time commission from the life insurance company for making the sale of the annuity. They are not paid any on-going commissions after the sale. It is a one time commission payment and that is all.
10. Are annuities a good investment option?
The answer to this question depends on an investor’s individual needs and circumstances. Annuities provide a guaranteed stream of income, which can be attractive to retirees who are looking for a predictable source of income. However, annuities may not be the best option for everyone.
Many Canadians enjoy having a certain amount of guaranteed income that they receive each month. Annuities are a great investment vehicle to achieve this by topping up Canada Pension Plan (CPP), Old Age Security (OAS) and any other pension income payments that the annuitant has.
In conclusion, annuities can be a valuable financial tool for Canadians looking to secure their retirement income. However, before making any decisions, it’s important to understand the ins and outs of annuities, including their different types, features, fees and tax implications.
By answering the top 10 annuity questions in Canada, we have provided a comprehensive overview of the most important aspects of annuities that potential buyers need to consider. Whether you are looking for a guaranteed stream of income, protection against market volatility or tax-efficient retirement savings, annuities can provide a range of benefits that may suit your needs. As with any financial product, it’s crucial to consult with a qualified advisor and do your own research before making any investment decisions.
Please reach out to us at Life Annuites.com to discuss your annuity options further. We can also run customized quotes from the top life insurance companies in Canada for you at no cost.