What annuities are

An annuity is a financial product that provides you with a guaranteed regular income. Typically, it’s used during your retirement and sold by an annuity provider, like a life insurance company.

How annuities work

You can buy an annuity with a lump sum or through multiple payments over time. The income payments you receive from an annuity are a combination of 3 things:

You may choose to either receive income payments for a fixed period or for as long as you live. Depending on the type of annuity you choose, you may receive income payments at different frequencies:

You may choose to start receiving your payments right away. You may choose to receive them later if you bought a deferred annuity.

The amount of the regular income you get depends on multiple things:

Types of annuities

There are many kinds of annuities. It’s important to understand each type of annuity and their options, benefits and risks.

Before you buy an annuity, you need to determine if:

Life annuity

A life annuity provides you with a guaranteed lifetime income. For example, suppose you buy a life annuity for $100,000 at age 65. You have an income of $500 per month, you’ll get your $100,000 back by age 82. If you live past 82, you’ll still receive $500 per month as long as you live.

Table 1: Example of a life annuity with a $500 monthly payment starting at age 65
Age of annuitant Number of monthly payments Amount received as income payments Amount gained or lost
70 60 $100,000 $30,000 -$70,000
75 120 $100,000 $60,000 -$40,000
80 180 $100,000 $90,000 -$10,000
82 200 $100,000 $100,000 $0
85 240 $100,000 $120,000 $20,000
90 300 $100,000 $150,000 $50,000

As this table shows, the longer you live, the more income your annuity provides.

In most cases, your life annuity payments stop when you die. No money goes to your estate or named beneficiary.

Certain annuity providers offer the following options so that payments continue after you die:

You can combine these options, but each additional feature will lower the amount of your payment.

Term-certain annuity

A term-certain annuity provides guaranteed income for a fixed period (term). If you die before the end of the term, your beneficiary or estate will continue to receive regular payments. They may also receive the balance of the regular payments as a lump-sum.

Table 2: Example of a $100,000 term-certain annuity with various lengths
Length of annuity term (years) Number of monthly payments Regular monthly payment Total amount received
5 60 $1,700 $102,000
10 120 $900 $108,000
15 180 $650 $117,000
20 240 $500 $120,000

This table shows that your regular payment is usually lower when you choose a longer guaranteed payment term. The longer your annuity term, the more money you or your beneficiary will make on your original $100,000 investment.

Variable annuity

Providers of that type of annuity invest your money in products with a variable return, such as equities. You receive a fixed income and a variable income. The fixed income is usually lower than what you would earn with a non-variable annuity.

The variable income you receive will vary based on the return of the investment. You may earn more money if the investments perform well, and less money if they perform poorly. Non-variable annuities make guaranteed income payments, regardless of the return.

Comparing different types of annuities

Annuities offer different options, review the pros and cons of each.

Life annuity

A life annuity provides you with a guaranteed lifetime income.



Term-certain annuity

A term-certain annuity provides guaranteed income payment for a fixed period.



Variable annuity

A variable annuity is when the provider invests your money in products with a variable return, such as equities.



What to consider before buying an annuity

Before buying an annuity, take the following into consideration.

When to buy an annuity

The best time to buy depends on your financial needs and sources of income.

For example, you may want more money early in your retirement to pay for travel or hobbies. You may also want more income later in your retirement to pay for health care or accommodations.

If you want more money later you may consider waiting to buy an annuity, or deferred annuity. This product allows you to pay for the annuity ahead of time and to start receiving payments later. Deferred life annuities provide higher regular payments than immediate life annuities. This is because you’ll receive fewer payments during your life.

You may buy an advanced life deferred annuity with money from your employer pension plan or your registered retirement savings. In this case, certain tax rules apply in terms of age and amount limits.

Learn more about the tax rules for advanced life deferred annuities.

Your other sources of retirement income

You may have multiple sources of retirement income.

This may include:

Having an annuity can make it easier to create a budget and manage your money. It’s especially the case if it’s your only regular source of retirement income.

However, an annuity is not always the best option for you. Your regular income and savings may already cover your expenses when you retire. Talk to a financial professional to determine if you’ll have enough money for your needs when you retire.

The overall price of an annuity can vary between providers

Annuity providers may offer you different income payments for the same type of annuity.

Providers calculate the monthly payment amounts they can provide based on many factors:

Before buying an annuity, ask for the list of fees and commissions. Make sure you understand the contract restrictions, including penalties and administrative fees.

Once you know what kind of annuity you’re interested in buying, compare similar products from several providers.

The option to leave money to a beneficiary or your estate

You may decide to leave money to your estate or a beneficiary when you die. If so, you could consider buying a term-certain annuity or a life annuity. You may add a joint and survivor option or a guaranteed payment period.

Buying an annuity is not the only option. For example, you can also keep some money in another product, like a savings account, TFSA or RRIF.

You may lose money

You’ll receive more money from a life annuity the longer you live. However, you may not live long enough to get the money you paid for the annuity.

Annuities may require a large investment

Buying an annuity can be expensive. For example, many annuity providers may ask that you invest $50,000.

Tax implications on annuities

You'll have to report the income you get from an annuity when you file your taxes. The income amount may be taxable. The amount of tax you may pay will vary depending on the product. Taxes will be different if you buy your annuity using registered savings versus non-registered savings.

Learn more about taxes and annuities.

How your annuity income is protected

Canadian life insurance companies have to be members of a consumer protection agency called Assuris. Assuris protects policyholders up to a certain amount if the annuity provider is unable to pay. You’ll then continue to receive at least some of your money if your provider goes out of business.

The income you receive from an annuity covered by Assuris is insured as follows:

For example, if your regular annuity income is $3,500 per month, you’ll continue to receive the full amount. If your regular annuity income is $6,500 per month, you’ll receive 90% of this amount which is $5,850.

Find the list of insurance companies that are members of Assuris.

Changing or cancelling an annuity

When you buy an annuity, you sign a contract with the annuity provider. Typically, once you buy an annuity, you can’t change the terms of the contract. This means you can’t switch to a different type of annuity or get your money back.

Your annuity contract may have a cooling-off period. This means that you can cancel the contract without a penalty within a specific amount of time. Read your contract carefully to see if it includes a cooling-off period.

The contract may give you the option to cancel within a certain period after you start receiving payments. There is usually a fee to do this which can be a percentage of the purchase price.

Contact your annuity provider for more information about your rights to change or cancel an annuity.

If you are thinking about buying an annuity, speak with a financial professional. They can help you figure out what’s right for you, when to buy it and when to start getting payments.

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