Does it fit your retirement plan?
At retirement, your focus shifts from saving money and building RRSPs to finding ways to draw a regular income and ensuring you don’t outlive your savings. A payout annuity is a unique product that provides regular guaranteed income in retirement. It’s the ideal solution if you don’t have a regular income from a company pension plan, or would like to add to that income.
Available only through insurance companies, payout annuities offer an excellent solution for retirement income. There are two types of payout annuities, both of which are available for a lump sum.
- A term certain annuity provides guaranteed income payments for a set period of time.
- A life annuity offers guaranteed income for the rest of your life, ensuring you won’t outlive your money.
With term certain and lifetime annuities, there’s no need to worry about stock market fluctuations or changes to interest rates.
What’s the right investment vehicle for you?
Guaranteed investments are safe and secure, but currently deliver a low rate of return. Stocks can provide a better return, but market volatility may involve too much risk.
Payout annuities are often used to supplement other retirement income streams, such as Old Age Security (OAS) or Canada/Quebec Pension Plan.
With a payout annuity you decide the type, the payment frequency, and the length of the guarantee.
Payout annuities are an excellent solution for:
- Converting your RRSP savings to a payout annuity instead of a registered retirement income fund (RRIF)
- Covering your predictable fixed monthly expenses
- Providing lifetime income for you and your spouse by purchasing a joint and last survivor annuity.
How does a payout annuity work?
With a payout annuity, you pay a lump sum, and your annuity income is based on the features you choose, combined with a few other factors:
- Amount of payment – The larger your lump sum payment, the higher the income payments.
- Guarantee period – The shorter the guarantee period, the larger your payments.
- Interest rates – While your regular payments won’t fluctuate with future changes in interest rates, your annuity payment is based on the current long-term interest rate outlook.
- Indexing – The higher the indexing rate, the lower your initial payment. However, over time, the payment level will increase and ultimately become higher than the non-indexed payments.
With life annuities, additional factors come in to play:
- Your age – When an annuity pays an income for life, your age impacts your income. The younger you are, the longer you’re expected to live, meaning your payments will be lower.
- Your gender – Since women typically live longer than men, payments are lower for women based on the assumption that the annuity will pay out for a longer period of time.
Tax benefits of payout annuities
If your annuity is purchased with registered savings (RRSP, LIRA, RPP), your income payments are fully taxable in the year you receive them. If you buy your annuity with non-registered assets, you are taxed on the income in the year you receive it but only a portion of each payment is taxable. The Canada Revenue Agency (CRA) allows you to choose one of two tax treatments – accrual or prescribed. Your advisor can help you determine which is best for your situation.
Equitable Life offers different options to suit your needs:
- Life Annuity provides guaranteed income for the remainder of your life,
- Term Certain provides guaranteed income payments for a specific period of time (5 to 30 years depending on your age at time of your application),
- Term Certain to Age 90 provides guaranteed income until age 90, and
- Joint Life Annuity provides guaranteed income for the remainder of your life and your spouse’s life.
If you choose a Term Certain or a life annuity with a guarantee period and pass away before the end of the guarantee period, your beneficiary will continue to receive your payments for the duration of the guarantee period or can opt to receive a lump sum benefit. (In some circumstances, the benefit must be paid as a lump sum.)
You can even choose to protect your annuity against inflation by choosing to index your payments by up to two percent each year.
Note: if you are using registered assets to purchase your annuity, not all of the choices above are available.
Is a payout annuity right for you?
The best way to determine if a payout annuity fits your financial plan is to speak with your advisor.