Retirement Plan
First of all, what is an annuity? An annuity is an insurance product that you buy to provide you with regular income in retirement, regardless of how long you live. Your income can be paid to you monthly, quarterly, semi-annually or annually.
The dollar amount of your regular payments will be a function of a number of variables including current interest rates and the amount of money you have with which to buy your annuity.
Once you buy your life annuity, you are locking this interest rate in for the entire payment period. Important to note is that rates from different insurance companies vary significantly, so you need to shop for the best rates.
Registered Accounts:
Life annuities can be purchased in registered accounts (RRSP, RRIF, LIF and others). You can also arrange for your employer’s ‘Registered Pension Plan’ to be converted fully or partially to a life annuity.
Also worth noting is that your annuity income is fully taxable in the year you receive it when your annuity is held in a registered account.
Non-registered Accounts:
Annuities can also be purchased with money you have outside of your registered investment accounts. The taxation of payments from a non-registered annuity can be quite favourable.
Non-registered funds can be used to buy a ‘prescribed’ annuity so that only the interest portion of your income is taxable. Notably, this interest portion remains at the same level throughout your lifetime giving you tax efficient retirement income.
Strategies:
One strategy would be for you to determine your minimum essential monthly income and buy an annuity in an amount that will give you the certainty of this income for the rest of your life.
Another strategy would be for you to use the money invested outside your registered accounts that is earning highly taxed interest and buy a prescribed annuity. You can increase your after-tax income in doing so.
Types of Annuities:
There are a few types of life annuities. Single Life Annuities will pay you periodic income for as long as you live. The income stops at your death and the value of the annuity is not part of your estate.
Joint Life Annuities will pay periodic income to two people and the income stops at the death of the second person. This type of annuity ensures that you and your spouse receive income for life.
Protection:
In order to protect you against a substantial loss in the event that you buy an annuity and die within a short period of time, you can add a minimum guarantee to the payment period. For example, if you add a ten-year guarantee to a single life annuity and die in the fifth year, the remaining five years of payments will be paid in a lump sum to your beneficiary.
Additional features and guarantees result in a lower payment to you. The highest income will result from a single life annuity with no guarantee. It is prudent to review quotes from several insurance companies including multiple combinations of desirable additional features to find the best value.
Your Health
Since annuities are life insurance products, your health is a factor. Initially unintuitive, poor health increases the annuity income payments you receive. The insurance company does not expect to have to pay you for long if you are unhealthy.
Is it for you?
A lot of people find the idea of having a ‘base’ income that is guaranteed for life very attractive. It’s like creating your own pension. In thinking through the factors, consider the following:
• Do you want a fixed income guaranteed for life?
• Do you mind giving up access to and control of a portion of your money?
• Do you mind locking in your money at current interest rates?
• Do you want to leave a legacy for your family or a charity?
Depending on your answers to the above questions, annuities may or may not be right for you. The use of life annuities can give you certainty and comfort that you have guaranteed and tax efficient income. But these benefits come with drawbacks and your decision is irreversible.
Learn more:
Perhaps you’re thinking about what to do with your pension funds once you retire or you are looking for a more tax effective income stream for your non-registered money. We can help you sort through the many issues related to annuities and shop around for the best rates since we’re not associated with just one insurance company.
Please feel free to call to learn more, we’d love to help.
Heather_Holden@ScotiaMcLeod.com
