As Canadians approach retirement, financial stability becomes a priority. One effective way to ensure a steady income in retirement is through annuities. This article provides a detailed overview of annuities, their benefits, and how they can add value to your retirement plan.
An annuity is a financial product that provides a steady stream of income, usually for life. It is a contract between an individual and an insurance company. The individual pays a lump sum or a series of payments to the insurance company, which in return guarantees regular payments for a specified period or for the rest of the individual’s life.
Types of annuities
- Fixed annuities: They provide regular, guaranteed payments. The amount does not change over time.
- Variable annuities: The amount of the payments varies and depends on the performance of the investments chosen by the annuity holder.
- Indexed annuities: Payments are linked to a specific index, e.g. a stock market index.
How Interest Rates Affect Annuities
Interest rates play a key role in determining annuity payouts. Higher interest rates typically result in higher annuity payouts. This is because the insurance company can invest the lump sum at higher returns, allowing it to offer better payouts.
The Bank of Canada has adjusted interest rates several times now, and more changes are expected. The U.S. Federal Reserve is also expected to begin lowering interest rates. These fluctuations affect the attractiveness of annuities. It is advisable to monitor interest rates and consider buying an annuity when rates are high.
Tax consequences of annuities
Annuities can have different tax implications depending on how they are structured. For example, adjustable annuities spread the taxable portion evenly over the life of the annuity, potentially reducing your tax burden. Before purchasing an annuity, it is important to understand the tax implications to maximize its benefits. In comparison, an investment account that grows will incur higher taxes when the account is established and lower taxes when the investment is depleted.
Benefits of annuities
- Guaranteed income: Annuities provide a steady stream of income, which can be crucial for retirees.
- Longevity Protection: Annuities can provide income for life by protecting against the risk of outliving your savings.
- Customization options: Annuities come in a variety of forms, including joint annuities and guaranteed annuities, which allows solutions to be tailored to individual needs.
Peace of mind
The main attraction is that you will never run out of money. Period. Yes, investment returns are important, but the peace of mind that comes with knowing that your income will always be available is what gives you true peace of mind.
Buy yourself or a loved one a pension.
So Mom just sold her house. You moved her into a nice retirement home. She likes it there. She wants to stay. But she’s worried she’ll run out of money. Plus, she’s nervous that the stock market will eat into her savings. Either way, she doesn’t want to watch the stock market anymore. Your solution might be to buy her a pension with some of the money from the house. That way, she’ll have another retirement income in her bank account every month. It’ll never end. She’s really happy now.
Who should consider annuities?
Annuities can benefit a variety of people, including:
- Retirees looking for a stable source of income.
- Parents wishing to provide care for a disabled child without giving him or her direct access to property.
- People who have recently sold a significant asset, e.g. a home, and want to ensure a steady income.
How to get started
To learn more about annuities, it is recommended that you consult with a financial advisor or broker. Pension Solutions Canada offers a free 15-minute Zoom call to discuss your specific needs and conduct market research to determine the best options for you.
Click here to book a free 15-minute consultation on Zoom.
Annuities can be a valuable tool for Canadians approaching retirement. By understanding the different types of annuities, the impact of interest rates, and the tax implications, you can make an informed decision that will provide a stable and secure retirement.
