What is an Annuity? All You Need to Know

Annuities can be a great way to provide yourself with a steady stream of income for retirement. They’re accessible, easy to apply for and provide stability during your retirement days, given how you need approximately $1 million to retire comfortably in Canada.

In this article, we’ll answer some frequently asked questions, including:

  • What is an Annuity?
  • Types of Annuities
  • Benefits and
  • Drawbacks

Let’s get right into it!

what-is-an-annuity

What is an Annuity in Canada?

An annuity is a kind of financial product, similar to an insurance contract. Annuities in Canada are typically sold by insurance companies and are contracts in which the purchaser deposits money for a set period of time, after which the insurer pays out a stream of payments to the purchaser (the annuitant).

Canadian annuities can either be fixed or variable. With a fixed annuity, the stream of payments is guaranteed to be the same amount each month, regardless of how the underlying investments perform. With a variable annuity, however, the payments may be more or less than with a fixed annuity, depending on the performance of the underlying investments.

Read more: RSP vs. RRSP

Who are Annuities for?

Annuities are typically sold to retirees, as a way to provide a steady stream of income in retirement. However, they can also be purchased by people who are not yet retired, in order to provide a cushion against potential financial hardships down the road.

Types of Annuities

Let’s take a closer look at a couple of different types of annuities you can purchase in Canada.

Life Annuity

A life annuity in Canada is a very common investment. This is a contract in which the insurer agrees to make monthly payments to the annuitant for the rest of their life. This can provide a guaranteed stream of income in retirement.

Term Certain

A term certain annuity is a type of annuity in which the insurer agrees to make a monthly annuity payment to the annuitant for a certain period of time, after which the contract ends and no further payments are made. This can be a useful way to ensure a fixed monthly income in retirement.

Benefits of Having Annuity Income

Annuities are designed to alleviate the stress caused by the lack of income after retirement. Let’s see what other benefits they bring to the table.

Possibility to Choose a Preferred Amount

One of the key benefits of an annuity income is that you can choose the level of income you want each month. This can provide a lot of peace of mind, knowing that you will have a steady stream of income in retirement, regardless of how the markets are performing.

It Supplements Your Income

If you already have a solid retirement savings plan, such as insurances, bank savings or any other type of capital, annuities can be a great way to furthermore supplement your income.

Extra Protection

An annuity can also protect your income. If you were to suddenly experience issues with your retirement savings fund, for example, the payments from your annuity investment could help to ensure that you still have a steady stream of income coming in each month. This can be a great way to help maintain your standard of living during difficult times.

No Taxes

Annuities are tax-deferred, meaning that you don’t have to pay taxes on the annuity payments, given how annuity taxation in Canada takes place from after you’ve started receiving your funds. This can be a helpful way to save on taxes.

what-is-an-annuity

Terms and Conditions

Despite the security they offer, annuities also come with certain rules and regulations. Why don’t we take a closer look?

No Access to the Money

One thing to keep in mind is that you can’t withdraw your annuity money all at once. This is because the purpose of annuities is to provide a steady stream of income in retirement, and not to act as a savings account. So, if you need access to your money sooner than expected, an annuity may not be the right product for you.

No Going Back

Another thing to keep in mind is that once you’ve chosen an annuity provider, you cannot change or cancel them. So, if you’re not happy with your provider, you’re stuck with them.

How Much Money Will I Be Receiving?

There are certain factors that determine the amount of annuity you receive, so it’s important to do your research before signing up for an annuity, in order to make sure you’re getting the best deal possible. Some of the variables include:

  • Your sex
  • Your age
  • Your initial investment
  • The type of annuity you choose
  • The provider
  • The interest rates at the time of purchasing
  • The length of the payout
  • Whether or not you name a beneficiary when you die

Our advice would be to consult different operators before you purchase an annuity, as well as in-depth research of the variables to make sure that you’re not underpaid.

Pros and Cons of Annuities

Let’s quickly sum up the benefits and the drawbacks of the annuity investment, to help you get a better picture of the whole ordeal.

Pros:

  • Annuities provide a guaranteed stream of income each month.
  • Annuities offer the possibility to name a beneficiary, thus allowing you to take good care of your loved ones after your demise.
  • A great alternative to RRSP funds

Cons:

  • No liquidity whatsoever, your money is locked forever. You only receive your monthly annuity payment, but you cannot withdraw your total balance at once.
  • Commissions are not avoided and they can amount to quite a bit of money over the life of the annuity.
  • Your annuity provider might go out of business. If this happens, you might only receive a portion of your investment back.

Finishing Thoughts

Annuities are a great way to supplement your retirement savings and provide you with security, but they come at the cost of liquidity. Before deciding on an annuity, be sure to consult different providers before making a decision so that you know what type is right for you.

FAQ

When should I buy an annuity?

It depends on whether or not you have a solid savings plan. The best thing to do is consult a financial advisor.

What is an annuity payment?

An annuity payment is a monthly payment that comes from your annuity investment. The investment cannot be withdrawn but is rather repaid to you by means of monthly payments when you retire.

Should I buy an annuity?

If you believe that you’re well equipped by your savings with the retirement fund in Canada, then an annuity is probably not necessary for you. However, if you believe that you haven’t saved enough, you may consider purchasing an annuity.

What is an Annuity in Canada?

An annuity is a type of insurance package for retirees. It provides extra protection and a steady monthly income for people who have stopped working due to retirement.

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