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What is an annuity?

Taking a chunk of your retirement savings to buy an annuity can provide peace of mind in your golden years.

Saving for your retirement can seem a little confusing. How much will you need to live during retirement? How much do you need to save regularly until then? What’s the best savings plan to follow? It doesn’t help that the government occasionally changes its policies on CPP, GIS, OAS and other forms of retirement income.

An annuity lets you turn your savings into regular payments during retirement. You can purchase an annuity from an insurance company, and get income for life. Let’s walk through what you need to know about getting an annuity in Canada.

What is an annuity?

An annuity is an insurance product that offers an annual income for the rest of your life in exchange for a single, one-time lump sum. The sum is typically drawn from your existing savings. Payments can be annually, semi-annually, quarterly or monthly.

Under this arrangement, you and your insurer are betting against each other. The insurance company is hoping that it doesn’t end up paying out more than you paid. You’re hoping to live long enough to get more than you initially paid.

How much does an annuity cost?

Annuities require a large, upfront amount. This may be as high as $50,000 minimum. If you don’t have a pile of savings on hand, an annuity may not be the right financial solution for you. Check out our guides on retirement savings accounts and how to avoid debt in retirement to learn more about strengthening your financial position for your golden years.

What is an annuity rate?

An annuity rate is the amount of your savings that the provider will pay out each year. Say you have $250,000 saved and you get a rate of 5%, you’ll get an annual income of $12,500 every year until you die.

If the annuity provider believes that you’re statistically likely to dye soon, it will offer a higher rate (meaning, you’ll get more money). If it thinks you’re more likely to live a long time, you’ll be offered a lower rate.

What types of annuities are there?

There are loads of different types of annuity on the Canadian market.

Life annuity

This is the most straightforward arrangement. With a life annuity, you get a fixed amount regularly as long as you live. Say you buy an annuity worth $150,000 at 65 years old with monthly payments of $750. You will have received $150,000 total by the time you’re 82. If you live past that, you still get $750 a month even though the insurance company has already paid out all of the savings you initially paid it.

Term-certain annuity

Similar to a life annuity, a term-certainty annuity gives you a fixed income payments. Unlike a life annuity, you only get these payments for a fixed period of time (term). If you pass away before the term is up, income payments will continue to be paid to your beneficiary or estate. Alternatively, your beneficiary or estate could receive a lump sum.

Variable annuity

If you feel comfortable assuming more risk, you could opt for a variable annuity, which divides your income payment into 2 parts: fixed and variable. With a variable annuity, your insurer invests a portion of your savings. The income earned from these investments can vary, which is why a portion of your income payment is variable. On the other hand, the fixed portion of your payment is a set amount, which is typically lower than you would receive with either a life or term-certain annuity.

How do I choose the best annuity for me?

As with most things, this depends on you personal preferences, health and individual circumstances. As with anything concerning retirement finances, it’s important to get advice before buying in.

Consider the following questions:

  • Which do you value more: Having a constant, secured stream of income or increasing your income through investments (at the risk of losing some of your money to the stock market)?
  • Do you have any dependents that will need your income after you die?
  • Do you want your income to keep pace with inflation (increase in value as the value of the Canadian dollar goes down)?
  • Would you prefer to take a higher recurring payment even if your income won’t rise with inflation?
  • How much will different types of annuity cost you? (Get quotes from multiple insurers to make sure you’re getting the best deal for your needs.)
  • How healthy are you? Do you smoke? Do you have any medical conditions? Is there any reason why you think your odds of dying are higher than average?

Will I be taxed on my annuity?

You have to pay income tax on your annuity payments like you do with other forms of income. This means you’ll declare your annuity payments on your tax return for the year in which you received those payments. The total income tax you’ll pay depends on your total income from all sources, including your annuity, CPP, OAS and employer pension payments.

However, you can potentially lessen your tax obligation if you hold your annuity in a non-registered account like an RSP (different to an RRSP). Fortunately, for annuities in non-registered accounts, you’re only taxed on the interest portion of your payments. You can also save on taxes by holding your annuity in a Tax-Free Savings Account (TFSA), although you can only do this for variable annuities, not life annuities.

What happens to my annuity when I die?

The exact options available to you may vary between insurers, but generally you’ll choose between the following options when buying an annuity. Choosing more than one option may lower your payments.

  • Joint and survivor option (for annuities paid to couples). As long as one of the annuity holders is alive, income payments will keep being paid.
  • Guarantee option. If you pass away within a prespecified window of time, income payments continue to paid to your beneficiary or estate.
  • Cash back option. If you die before being receiving a certain amount in annuity payments (usually equal to the amount of your lump sum), your beneficiary or estate will receive a one-time payment.

Pros and cons of annuities

Pros

  • You have the security of getting guaranteed income for life.
  • Your income can be protected from inflation and stock market fluctuations.
  • If you have poor health, you may be offered a higher payment rate.

Cons

  • If you end up dying earlier than you thought, your dependents may lose out on your annuity income (depending on the arrangements you made when the annuity was bought).
  • Annuities are irreversible. There’s no going back if you change your mind.
  • Your retirement savings are no longer invested (unless you choose a variable annuity), so you won’t benefit from stock market increases.

Compare brokerages that offer retirement investment accounts

Name Product Available Asset Types Stock Fee Option Fee Account Fee ETF Transaction Cost Feature Table description
OFFER
Wealthsimple Trade
Stocks, ETFs
$0
N/A
$0
Free
Get a $50 bonus when you open a Wealthsimple Trade account and deposit and trade at least $100.
Pay no commissions when you trade Canadian stocks and ETFs with Wealthsimple Trade.
Scotia iTRADE
Bonds, Options, Mutual Funds, ETFs, GICs, International Equities
$4.99-$9.99
$9.99 + $1.25 contract ($4.99 + $1.25 contract if completed 150 trades or more a quarter)
$0
$9.99 ($4.99 if completed 150 trades or more a quarter)
Pay no annual account fees.
Buy, sell and trade ETFs, Equities, Options and more with competitive commissions.
CIBC Investor's Edge
Stocks, Bonds, Options, Mutual Funds, ETFs
$4.95 - $6.95
$4.95 - $6.95 (+$1.25 per contract)
$0 if conditions met, otherwise $100/year
$6.95
$4.95 - $6.95 is applicable for online stock, ETF and option trades only. Pay $4.95 when you qualify as an Active Trader (trade 150+ times per quarter).
An intuitive and easy-to-use platform with access to a variety of tools that help you make smart decisions and trade with confidence.
Interactive Brokers
Stocks, Bonds, Options, ETFs, Currencies, Futures
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
$0
Min. $1.00, Max. 0.5% of trade value
Extensive trading capabilities and global investment tracking.
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95-$9.95
$9.95 + $1 per contract
$0
Free
Get $50 in free trades when you fund your account with a minimum of $1,000.
Opt for self-directed investing and save on fees or get a pre-built portfolio and take some of the guesswork out.
Qtrade Direct Investing
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
$6.95 - $8.75 + $1.25 per contract
$0 if conditions met, otherwise $25/quarter
$0 - $8.75
Trade 100 select ETFs free of charge.
Qtrade Direct Investing offers low trading commissions and an easy-to-use platform with access to powerful tools and a wide selection of investment options. Trade 100 ETFs free of charge and thousands more for $8.75 or lower.
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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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