Annuities for retirement planning

Lloyd Litke |

Outliving retirement savings is an uncomfortable scenario that nobody wants to contemplate. But even after all those years spent saving for retirement, many Canadians may need their nest egg to last longer than they anticipated. Thanks to modern medicine and overall healthier lifestyles, life expectancy is increasing – rising to 83.1 years in 2024.

While this is good news, one of the realities of living longer is having to finance those extra years of retirement. Volatile financial markets, combined with inflation, means many retirees may run of out of their savings.

One solution worth considering is a unique investment option called an annuity.

What’s an annuity?

An annuity is an investment offered by insurance companies that provides a guaranteed income stream, either for a predetermined period or for the rest of your life. In exchange for a lump-sum deposit of capital, the insurer makes regular income payments to you that include both interest and a return of principal.

Depending on your income needs, you can choose a life annuity, which provides a steady stream of income during your lifetime, with the option of having payments continue to your spouse or beneficiaries after your death. There’s also a term-certain annuity, which provides a guaranteed regular income for a set amount of time. If you die before the end of the term, payments will continue to your estate or beneficiaries.

How do annuities work?

Annuities are like a do-it-yourself pension plan that allows you to defer payments. Let’s say you want to put some money into an annuity today, but don’t want income payments to begin until five years from now. During those five years, the entire principal investment earns interest, which increases the payment amount later.

You can choose to receive payments on a monthly, quarterly, semi-annual, or annual basis. Keep in mind, however, that payment amounts cannot be changed once you lock them in.

Annuities may also offer an advantage when it comes to taxation, depending on your age and the source of the annuity’s capital.

  • If you’re 65 or older when you buy an annuity, the income usually qualifies for the pension income tax credit and for pension income splitting.
  • If purchased with money from a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF), your payments will be fully taxed since you’re using pre-tax dollars.
  • If purchased using non-registered funds (that is, money you have already paid income tax on), only the interest portion of your income payment is taxable, since the rest of the payment consists of a return of your invested principal. Interest income can be averaged over the lifetime of the annuity, which provides an element of tax deferral, which is subject to certain conditions.

Is an annuity right for you?

If you are nearing retirement or are already retired, an annuity can be a good option for additional income. You may want to bridge the gap until your government and employer pensions kick in, or perhaps you simply want a reliable source of income that won’t be affected by market fluctuations.

Once you purchase an annuity, that investment is locked in, so it’s important to consider your financial situation and retirement goals. If you already have a generous employer pension plan with ample income payments, you may not need the benefits of an annuity. And if your health is an issue, you’ll want to be confident that you will live long enough to get a satisfactory payout from your principal investment.

However, annuities can provide some reassurance that basic expenses will be covered as long as you live. They can be seen as a form of risk management, a way to hedge your bets – to ensure that even if you live longer than expected, you’ll still have payments coming in. Regardless of whether you live to be 75 or 95, an annuity can provide a portion of steady retirement income.

Annuities aren’t meant to make up your entire retirement portfolio, but they can be an important component of an overall plan. Think of them as one tool in your retirement toolbox. In tandem with stocks, bonds, and other investment options, they can help you build a more stable retirement income stream.

Six factors that can affect your annuity income:

1. The amount of money you invest: The more money you put in, the more income you get back

2. Interest rates at the time of purchase: Higher interest rates when you buy your annuity mean higher income payments

3. Your age: The older you are when you purchase an annuity, the higher your annuity payments will be, since you’re not expected to live as long

4. Your gender: With a life annuity, women get less money than men of the same age simply because, on average, women live longer

5. The length of time annuity payments are guaranteed: With a term-certain annuity, you decide on the number of years you receive income payments. The longer the term, the lower the payments. With a life annuity, you can arrange for income payments to continue to your spouse, your beneficiaries, or your estate after you die. The longer you want payments to continue after your death, the less you get each month while you’re alive

6. Income deferral: The period between the purchase date and when income payments start – the longer you wait to receive payments after purchasing an annuity, the higher the payments will be, since your capital will earn interest during the interval


Please contact us to learn more and to see whether an annuity makes sense for your situation and retirement plans