Canadian Annuity Definition - Updated 2023

By Phil Barker
annuity definition
Figure 1. Annuity Definition

What is a Canadian Annuity?

A Canadian life annuity, often referred to simply as a life annuity or annuity, is a financial product commonly used in Canada for retirement planning and income security. It is a contract between an individual and a life insurance company. In exchange for a lump sum payment, the insurance company agrees to provide the individual with a regular stream of income for a certain period of time or for the rest of their life, regardless of how long they live. The insurance company invests your deposit and guarantees that you will receive annuity payments for the contract period or you entire life.

Why Buy an Annuity?

Buying an annuity in Canada can be a sound financial decision for several reasons, depending on your individual financial goals and circumstances. Many investors will use their registered on non-registered investments to purchase an annuity to create a stream of retirement income payments.

Here are some compelling reasons why individuals choose to buy annuities in Canada:

Guaranteed Lifetime Income: Life annuities provide a guaranteed stream of income for as long as you live, which can help ensure financial security in retirement. This is especially valuable for retirees who want a predictable and stable income source to cover essential living expenses.

Risk Management: Annuities shift the risk from the individual to the insurance company. With an annuity, you don't have to worry about market volatility, investment decisions, or outliving your savings. The insurance company assumes these risks.

Simplicity: Annuities are straightforward financial products. You make a lump sum payment and in return, you receive regular income payments. There's no need to manage investments or make complex financial decisions.

Inflation Protection: Some annuities in Canada offer inflation protection options, which can help your income keep pace with rising living costs. This can be essential for maintaining your purchasing power in retirement.

Tax Efficiency: Annuity income in Canada is often taxed favorably. A portion of the income may be considered a return of capital, resulting in lower immediate tax liability, particularly when purchased with non-registered funds.

Longevity Protection: Annuities are particularly valuable if you are concerned about outliving your savings. They provide a financial safety net, ensuring you receive income no matter how long you live.

Estate Planning: Annuities can be used as part of an estate planning strategy. While annuity payments are typically for the annuitant's lifetime, you can include features like guarantee periods or joint-life options to provide income for beneficiaries after your passing.

Predictable Cash Flow: The predictable nature of annuity payments can make budgeting and financial planning more manageable. You know exactly how much income you'll receive, making it easier to plan for expenses and lifestyle choices.

Protection from Creditors: In many Canadian provinces, annuities enjoy some level of protection from creditors, which can be valuable if you have concerns about financial liabilities or lawsuits.

Flexibility: There are various types of annuities available in Canada, allowing you to tailor your choice to your specific needs. You can select between single-life annuities, joint-life annuities, term-certain annuities, and more.

Health Considerations: For individuals with certain medical conditions or factors that may impact life expectancy, enhanced or impaired life annuities may offer higher payouts, providing additional financial support for healthcare needs.

It's important to note that while annuities offer many advantages, they may not be suitable for everyone. Factors like your financial goals, risk tolerance, and the need for liquidity should all be considered when deciding whether to buy an annuity. Consulting with a financial advisor or retirement planner can help you make an informed decision about whether an annuity aligns with your overall financial strategy and retirement goals.

Why are annuities popular?

Annuities are popular in Canada for several reasons, reflecting the unique financial and retirement planning needs of Canadian residents. One of the main reasons for their popularity is because they can provide a guaranteed stream of income for life. In Canada, where social safety nets like the Canada Pension Plan (CPP) and Old Age Security (OAS) play a significant role in retirement income, annuities offer an additional layer of income security. This is particularly attractive to retirees looking for predictability and stability in their retirement finances.

Overall, the popularity of annuities in Canada can be attributed to their ability to provide retirees with financial security, protect against market volatility, and offer tax advantages.

What Are The Downsides of Buying an Annuity?

While annuities offer several benefits, they may not be the right financial product for everyone in Canada. It's important to consider the potential downsides and limitations before purchasing an annuity. Here are some of the downsides to be aware of:

Loss of Liquidity: When you purchase an annuity, you exchange a lump sum of money for a guaranteed stream of income. This means you lose access to that lump sum, which can be a drawback if you need a large sum of money for unexpected expenses or investments.

Irreversibility: Annuities are usually irreversible. Once you've bought one, you can't change your mind and access the principal or change the terms of the annuity. This lack of flexibility might not suit those who anticipate changing financial needs.

Limited Inheritance: If you choose a single-life annuity without additional features like a guarantee period or joint-life option, the annuity payments end upon your death. This means there may be limited or no inheritance left for your beneficiaries.

Inflation Risk: While some annuities in Canada offer inflation protection, it often comes at an additional cost. If you don't choose an inflation-protected annuity, the purchasing power of your fixed annuity payments may decrease over time due to rising living costs.

Before purchasing an annuity in Canada, it's essential to carefully consider your financial goals, risk tolerance, and retirement needs. Annuities can be a valuable part of a retirement income plan, but they should be chosen with an understanding of their limitations and how they fit into your overall financial strategy. Consulting with a financial advisor or retirement planner can help you make an informed decision based on your specific circumstances.

What is an Annuity Quote?

Click here to view an example of an annuity quote.

Why Consider a Life Annuity?

Considering buying a life annuity in Canada can be a prudent financial move, especially if it aligns with your retirement goals and financial needs. Here are some reasons why you would consider purchasing an annuity:

  • Stable Income Stream: Annuities offer a reliable source of income.
  • Simplicity: They provide a straightforward investment option.
  • Prevent Outliving Savings: Annuities ensure you won't outlive your financial resources.
  • Customization: You can tailor annuities to meet your specific needs.
  • Payment Choices: Annuities offer flexibility in selecting payment options.
  • Efficient Estate Settlement: Annuities can expedite the settlement of your estate.
  • Inflation Protection: Some annuities safeguard your income against the effects of inflation.
  • Favorable Tax Treatment: Annuity income often enjoys tax advantages.
  • Longevity Insurance: They act as insurance against outliving your assets and market volatility.
  • Spousal Income Guarantee: Annuities can provide income security for your spouse.
  • Tax Reduction: They may help reduce your overall tax liability.

Annuity Ebook "What is an annuity?"

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Download the various company annuity brochures from BMO Insurance, Canada Life, Empire life, Equitable Life, Industrial Alliance, ivari, La Capitale, Manulife, RBC Insurance and Sun Life Financial.

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Phil Barker

About the Author

Phil Barker

Phil Barker is a leading expert on life annuities in Canada. has different financial products and has been a recognized authority since 1972.

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