Types of annuities
There are several types of annuities, with various types of payout schemes.
You can, for example, choose payments for a fixed number of years, or you
might choose payments that last for the rest of your life, however long
that might be. You can opt for monthly, quarterly, or semi-annual, or
For example, a “Term Certain Annuity” guarantees an income for as long as
you want, up to age 90. If you die before all payments are received, the
balance will go to your estate.
Another option is a “Life Annuity,” which guarantees a regular income for
as long as you live. However, payments stop when you die, and no money will
go to your estate.
Many people who must choose an RRSP maturity option opt for some
combination of an active RRIF portfolio and an annuity to continue
providing growth, inflation protection, and a guaranteed income stream.
Another option may be to invest a portion of your portfolio in an insurance
product that offers a guaranteed income withdrawal feature.
This type of product, called a Guaranteed Minimum Withdrawal Benefit
product is similar to an annuity in that it guarantees a specific regular
monthly, quarterly, or annual payment until you pass away. But unlike an
annuity, the guaranteed income stream could increase as the investments in
your portfolio increase. You can cash out of this type of policy and take
the “cash surrender value” if your situation changes dramatically and you
need the cash. (But I do not recommend taking the cash out of this type of
policy except as a last resort.)
Once you buy an annuity, of whatever type, you’re locked into its terms,
and you won’t be able to change them.
Factors affecting annuity payout
Because annuities are ultra-conservative products, they are typically tied
to the level of prevailing interest rates. And those rates have been
ultra-low since 2008. Annuity rates have thus also been correspondingly
low, making annuities a less desirable RRSP maturity option than RRIFs for
the past few years.
Other factors that typically affect the annuity payment you’ll receive are
your age and gender (the older you are, the higher your payments, and women
typically live longer than men), the amount you deposit and the length of
the term, and any options or riders you add to the policy (such as
joint-and-last-survivor), which increase the insurance company’s costs.
Annuity income is not taxed if the policy is purchased with non-registered
funds (that is, you’re buying it with after-tax dollars). Income from
annuities purchased with RRSP or RRIF funds will be taxed at your marginal
rate (you’re purchasing the annuity with dollars from registered funds that
have not been taxed). A “Prescribed Annuity,” which levels out the interest
and principal portion in each payment, is one way to defer the tax bill, at
least in the early years of the annuity payout.
Not for the do-it-yourselfer
Annuities are complex products, and it is important that you understand how
interest rates and other factors affect how much income you will receive.
It may not be advisable to convert all of your RRSP into an annuity – this
will depend on your investment objectives and risk tolerance. I recommend
seeking the advice of your financial planner and/or a licensed insurance
agent to discuss annuity options and how they might best fit into your
overall retirement plan. – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. Contact her directly by
phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.