What are Annuities?
Annuities are a long-term savings contract designed to provide the client with a guaranteed income for a specified length of time or, in some cases, for life. The funds can be sourced from registered or unregistered contracts, banked savings, capital gains or other sources of capital, after-tax or tax-deferred.
The payout of annuity, whether monthly, quarterly or annually, will be determined by the life expectancy of the client and interest rates at the time that the annuity was taken out.
Term Certain Annuities:
Term Certain Annuities guarantee payments for a pre-determined and set length of time. This is from I to 50 years, at the end of which set time, the annuity payments stop.
Features of Term Certain Annuities:
Indexation. The annuity will increase payments in relation to an inflation factor determined at the time the annuity is purchased.
The income is guaranteed for the whole term of the contract.
The contract is safe from market fluctuations.
There is no management required on the part of the annuitant.
There is no minimum age to purchase the annuity.
For Non-Registered Term Certain Annuities, we can benefit from:
A pension income tax credit.
Pension income splitting.
Life Annuities:
The advantage of the Life Annuity is that it will continue to pay the annuitant until his/her death. The amount of the payout is determined at the time the annuity is purchased and will be stable for the remainder of the annuitant’s life.
Guarantee Period: This is also selected at the time the annuity is purchased. A term is selected for the guarantee at the discretion of the annuitant, which will assure that should the annuitant die before the guarantee period is exhausted, the remaining funds will be paid out to his/her estate or a named beneficiary.
Joint and Survivor Annuity: In most cases this is designed for the spouse to continue to receive income from the annuity in the case of the annuitant’s death. In this case the surviving annuitant will also receive income for the remainder of their life.
The Life Annuity is also subject to indexation at the discretion of the annuitant.
A cash refund is available on the death of the annuitant, as an option to be paid out to a named beneficiary.
Benefits of a Life Annuity:
Income is guaranteed for life.
Not impacted by market fluctuations.
No management is required on the part of the annuitant.
Taxable at the marginal tax rate of the annuitant at the time of payout.
Predictable life income for secondary annuitant.
Annuities that are purchased from registered funds, such as RRSPs, constitute a supplementary income in retirement, in addition to pension plans and government supported plans such as the CPP and OAS available in Canada.
Non-registered funds that are used to purchase an annuity may well be a self-financed retirement plan, where the annuitant does not have a pending corporate pension or where the pension that will be paid out at retirement is much less than the annuitant needs to cover his/her basic retirement overhead.
Annuities increasing popularity:
Life expectancy is increasing dramatically in the developed world and seems destined to continue to do so well into the future. If the current science on the matter is correct, our grandchildren may well live to or past their 120th year.
Stable income for the whole of our retirement allows us to make long-term plans for our health and lifestyle.
Annuity interest rates are based on long-term analysis of returns over more than fifteen years and, as such, are more stable and less likely to fluctuate than short-term rates.
Indexation of an annuity protects the annuitant against the deteriorating effects of inflation.
There is no possibility of out-living our savings.
Annuities can be purchased over a staggered length of time, allowing the annuitant to benefit from further market growth.
Returns on investment for annuities get better over time. The longer we live, the better the return on the invested dollar.
Taxes are not withheld at the source. This creates a marked flexibility for the annuitant who may well have some tax mitigating deductions available to him/her.
Are annuities for everyone? We could easily make the argument that they have a place in almost every portfolio, however, this would leave out the client’s own preferences for choosing the product that best suits his/her needs.
Let us just say that annuities offer a very special form of life security that serves the cautious investor very well. Guaranteed income for life is a benefit that few enjoy, even in our social safety net world. Make your choices wisely and always consult a professional when it comes to the investment of your hard-earned dollars.
