An annuity is a financial product that provides a guaranteed income stream for a set period of time or the remainder of one’s life. Annuities are typically purchased with a lump sum payment which is given to the insurance company at the time of purchase. The amount of income generated is determined by a number of different factors which include the initial investment amount, interest rates, source of funds, age of the annuitant, type of annuity chose and more.
The best age to purchase an annuity for most Canadians will vary based on several different factors, including their retirement goals, financial situation and risk tolerance. However, some general guidelines can help individuals make an informed decision about when they should purchase an annuity.
Retirement Goals
The first factor to consider when deciding what is the best age to purchase an annuity is your retirement goals. Individuals who are looking for a stable, guaranteed income stream to cover basic living expenses in retirement may benefit from purchasing an annuity earlier in life, whereas those who are comfortable taking on more investment risk may choose to wait. This would open their investments to more market risk, but potentially increase the amount that they are able to deposit into the annuity.
If an individual’s retirement goal is to ensure that they have a sufficient, guaranteed income stream to cover basic living expenses, purchasing an annuity earlier in life may be the best option. This is because annuity payments are based on life expectancy, and the younger an individual is when they purchase an annuity, the longer their life expectancy, and the lower the payments. As such, individuals who purchase an annuity in their 50s or early 60s may receive a higher amount of income over time when compared to those who purchase an annuity later in life (because of life expectancy).
Financial Situation
The second factor to consider when deciding the best age to purchase an annuity is one’s financial situation. Individuals who have a significant amount of savings and investments may not need to purchase an annuity until later in life or at all. Those who have limited savings and are risk adverse, may benefit from purchasing an annuity earlier.
Individuals with a large amount of investment savings may not need to purchase an annuity until later in life because they have other sources of income that can cover their basic living expenses in retirement. However, those with limited savings may want to ensure that they have a fixed amount that they receive every month to cover a portion or all of their monthly expenses.
Having a pension from a previous employer in retirement can also play a large factor on whether or not you should consider an annuity (or the amount of the annuity). Those who do not have guaranteed sources of income in retirement are typically more inclined to purchase an annuity than those who have pension income besides Canada Protection Plan and Old Age Security.
Risk Tolerance
The third factor to consider when deciding on the best age to purchase an annuity is risk tolerance.
Individuals who are risk-averse, do not have a pension from a previous employer and would prefer to have a guaranteed income stream in retirement may benefit from purchasing an annuity at their retirement age. This takes out the guessing of investment returns and provides peace of mind.
Those who are more comfortable taking on more investment risk and have substantial retirement savings may choose to wait to purchase an annuity to grow their retirement investments as they may be able to generate higher returns through other investment vehicles.
Tax Considerations
Finally, it’s very important to consider tax implications when considering the purchase of an annuity. Annuities are taxed depending on where the source of the funds come from to purchase the annuity.
For example, if the funds used to purchase an annuity are coming from a registered account (RRSP or RRIF), the annuity payments are 100% taxable as income to the annuitant in the year that they are received. If the funds are coming from a non-registered source (OPEN account), the annuity payments have a portion of taxable income and a portion that is tax-free. A prescribed non-registered annuity has level taxation for the duration of the annuity whereas a non-prescribed non-registered annuity does not.
As a result, you will want to look at your current income and projected incomes in retirement to help determine what type of annuity you should purchase, when to purchase and how it will impact your taxes.
Individuals who purchase an annuity earlier in life may benefit from lower tax rates as their income may be lower in retirement. However, individuals who purchase an annuity later in life may benefit from lower tax rates as well, as they may have fewer deductions in retirement. As such, it’s essential to consult with a tax professional before making any decisions regarding annuity purchases.
Conclusion
It is safe to say that the right age to purchase an annuity is dependent on the annuitant (person who is receiving the annuity income) because everyone has a unique situation, investment portfolio and income needs.
When deciding on when to purchase an annuity in Canada, it will vary based on several factors which include your retirement goals, financial situation, risk tolerance, tax considerations and income needs.
Individuals who are looking for a stable, guaranteed income stream to cover basic living expenses in retirement may benefit from purchasing an annuity earlier in life, whereas those who have a significant amount of savings and investments or are comfortable taking on more investment risk may choose to wait.
As always, we highly recommend that you discuss your personal situation with us to get a better understanding of your current situation and your needs in retirement. It is also advisable to discuss with your accountant so that you understand how the payments from the annuity will impact your taxable income for your retirement years.
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.