Why Annuities Deserve Consideration in Your Financial Plan
When it comes to building a strong financial foundation for retirement, most Canadians focus on stocks, bonds and mutual funds, among other investments. While these are essential pillars of a strong Investment plan in the early and accumulation years, there’s another tool that often flies under the radar, especially during retirement, that can provide significant peace of mind: annuities.
Annuities are insurance products designed to convert your savings into a steady, guaranteed stream of income, for life or for a set period. In a world where longevity is increasing and market volatility is a concern, annuities offer stability and predictability—qualities that become more valuable the closer you get to retirement.
What is an Annuity?
An annuity is a financial product you purchase—typically with a lump sum—from a life insurance company. In exchange, the insurer promises to pay you a guaranteed income, either for a specific number of years or for the rest of your life. Annuities are particularly appealing for those seeking to reduce financial uncertainty, as they can act as a personal pension, supplementing government benefits like the Canada Pension Plan (CPP) and Old Age Security (OAS).
They are also customizable, allowing you to tailor them to your specific needs and can provide peace of mind by ensuring you won’t outlive your savings—a key concern for many retirees in an era of increasing life expectancy.
Types of Annuities in Canada
Here are the most common types available to Canadians:
1. Life Annuities
These provide guaranteed income for as long as you live. This can be crucial for individuals worried about outliving their savings.
2. Term-Certain Annuities
These pay out for a predetermined period—say 10 or 20 years—regardless of whether you live that long. If you pass away before the term is up, your beneficiary continues to receive payments.
3. Guaranteed Life Annuities
This type combines the above two by offering payments for life, but with a guarantee period (e.g., 10 years). If you pass away within the guaranteed term, your beneficiary will continue to receive payments for the remaining guaranteed period.
4. Joint and Survivor Annuities
Ideal for couples, this annuity continues to pay income as long as either spouse is alive.
Optional Features & Add-Ons
Annuities can be customized with various features:
Indexing: You can opt to have payments increase each year to help offset inflation.
Guarantee Periods: Ensures payments continue to a beneficiary for a minimum period (e.g., 5 or 10 years), even if you pass away early.
Cash Refund Option: If you die before receiving payments equal to your premium, the remaining amount is paid to your beneficiary.
Impaired Life or Enhanced Annuities: If you have a reduced life expectancy due to health issues, you may qualify for higher payments.
Key Benefits of Annuities
Guaranteed Income: Provides a stable cash flow, no matter how markets perform.
Longevity Protection: Reduces the risk of outliving your savings.
Different Investment Types: Annuities can be purchased with both registered (RRSP, LIRA, RRIF etc..) and non-registered funds, which makes it very flexible, especially with those in retirement.
Simplicity: Annuities require little ongoing management compared to investment portfolios, freeing you to enjoy retirement without worrying about market fluctuations.
Tax Efficiency: In non-registered accounts, prescribed annuities can spread taxable income evenly, reducing your annual tax burden.
Customizable: You can choose how often you receive payments (monthly, quarterly, or annually) and whether they continue to a spouse or beneficiary.
Who Are Annuities Best Suited For?
Annuities aren't for everyone—but they can be a great fit for:
Retirees seeking stability: Especially those without defined benefit pensions.
Conservative investors: Who prioritize income over growth.
Single individuals: Who want guaranteed lifetime income without needing to manage investments.
Those worried about market volatility: Wanting to lock in predictable returns.
People with longer life expectancy: Who benefit most from lifetime payouts.
Tax-Conscious Investors: Clients with non-registered funds may benefit from prescribed annuities, which can reduce taxable income by spreading it over time.
When to Consider Buying an Annuity
Annuities are usually considered approaching or in retirement, however, timing depends on your personal situation, such as other income sources, life expectancy, and financial goals.
Some people “ladder” annuity purchases over several years to manage interest rate risk, buying portions over time to take advantage of potentially higher rates in the future. As such, purchasing an annuity when interest rates are higher would provide a higher income stream versus lower interest-rate environments.
While annuities might not be flashy, they offer something increasingly rare: peace of mind. They complement other retirement strategies by adding diversification and stability. When used properly in a Financial Plan, they can add stability, protect against longevity risk, and reduce stress in retirement. While investments like stocks or real estate offer growth potential, they come with risk. Annuities, on the other hand, provide a foundation of guaranteed income, allowing you to take calculated risks elsewhere in your portfolio. They can also simplify financial planning by reducing the need to constantly monitor investments or adjust withdrawals.
For many Canadians, annuities serve as a “set it and forget it” solution. They’re not about chasing high returns but about creating certainty—an invaluable asset in retirement. By covering essential expenses, annuities free up other savings for discretionary spending, travel, or legacy planning.
If you’re interested in learning whether an annuity could fit into your retirement strategy, get in touch with us and we can guide you on the different options, and whether an annuity would fit within your unique situation.