Annuities are most commonly used to generate a source of guaranteed income during retirement. In Canada, they are often part of an overall investment strategy, along with stocks and bonds. Annuities also offer many tax benefits that make them an attractive source of income during retirement. Because they are long-term financial instruments, annuities offer the stability many Canadians need while protecting the purchasing power of your saved funds (even against inflation).
With interest rates on the rise and the stock market extremely volative in 2022, many Canadians are starting to consider having an annuity within their portfolio to guaranteed at least a portion of their retirement income. An annuity is a financial product that pools your money with others and uses the accumulated capital to generate an investment income. Depending on the type of annuity, the income form might be either for life (this is the case with a life annuity) or only for a specific term (term certain annuity), or both.
Annuities are often misunderstood, which causes some people to be reluctant to learn more about annuities and how they could be a useful part of your retirement planning.
Types of Annuities
Annuities are a type of insurance product designed to provide a guaranteed income stream for life. As a result, annuities are often used as a retirement income strategy. There are two main types of annuities available in Canada: life annuities and term certain annuities.
Life Annuities
A life annuity is a contract that promises to pay you a certain amount of money for the rest of your life. This is also known as an immediate annuity. There are different ways to structure a life annuity, but a single premium immediate life annuity is the most common. This means that you make one lump-sum payment to the insurance company and then receive payments on an ongoing basis until you die.
Term Certain Annuities
A term certain annuity is similar to a life annuity except that it has a fixed term. For example, if you buy a 10-year term certain annuity and live beyond the 10 years, your insurance company will make payments to you for the 10 years and stop at that point.
Advantages of an Annuity
As previously mentioned, annuities are a type of investment that pay out a guaranteed income stream of payments for your lifetime (typically monthly). They’re also known as life insurance policies that pay you a monthly income for the rest of your life. The amount you receive each month depends on several factors and is determined when the annuity is purchased. You will want to speak with one of our brokers to determine what your payments could potentially be.
Annuities are popular among retirees because they provide guaranteed lifetime income and can help protect against inflation over time. In addition, annuities may have tax advantages depending on how they’re structured. However, they may not be for everyone so be sure to consult with a professional to better understand how an annuity would fit into your retirement income strategy.
Primary Reason — As Part of Your Retirement Investment Plan and Strategy
In Canada, the primary reason for buying an annuity is as part of your retirement investment plan and strategy. Annuities are a very tax-efficient way to receive income in retirement and have become increasingly popular this year (2022) with the Bank of Canada continually increasing interest rates. Although annuity payout rates are not solely based on interest rates, you will see an increase in annuity payouts with an increase in interest rates.
Many retirees appreciate the guarantees of annuities which is why they play such an important role in many Canadians retirement investment strategy. It is very common to see annuities purchased to cover off the fixed expenses for retirees so that they have the peace of mind knowing that all of their fixed costs are covered every month.
For some, it could be a top up from their Canada Pension Plan (CPP) and Old Age Security (OAS) to bring them to a monthly income level that they are comfortable with. For others, they may be very risk adverse and invest a larger portion of their assets into annuities to secure a higher guaranteed income because of a lack of pension income. Every situation is unique so make sure that you take the time to analyze your needs before making a decision.
The money you put into an annuity will be invested by the insurance company and earn interest based on prevailing interest rates. When you retire, you will receive regular payments from the insurance company until you die (or for a specified period) or stop receiving payments because of certain events (such as reaching age 100).
Another reason that annuities are popular is because people fear that they will outlive thier money. They don’t want to run out of money and feel like an annuity is a sure way to ensure they don’t.
Conclusion
In short, when considering an annuity’s advantages, you need to view it as a part of your investment strategy. This strategy might be a mix of stocks and bonds, Canadian or foreign investments, real estate, Guaranteed Investment Contracts (GIC), and other investments. The objective is to protect and grow your investment capital so that you can eventually access the money when needed during your retirement years.
Some Canadians choose an annuity as part of their retirement investment plan and strategy. An annuity plan takes a portion of your money and places it into an account that will provide regular income for the rest of your life. The rest can be invested, along with any future deposits, elsewhere. It is especially popular for people who have accumulated savings, are looking to secure a guaranteed income in retirement without worrying about the fluctuations in the stock market.
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