Avoid paying more tax by purchasing annuity before December 31, 2016

The tax benefits of non-registered prescribed annuities will change on January 1, 2017. The new rules will result in an increase in the taxable portion of income payments, and that will reduce their tax effectiveness (see Tables 3 and 4, below). Still, annuities can retain their value as a product that helps mitigate the riskRead More… 

Annuity “paycheque” key to happiness

You may have seen headlines such as “Lifetime Income Stream Key to Retirement Happiness”, and “Happiness in Retirement is a steady income”.

Studies show that life annuities generating a retirement “paycheque” from an annuity can make retirees smile.  According to Towers Watson, people with annuitized income are happiest, compared to retirees with similar wealth and health characteristics. 
And according to the CD Howe Institute, most middle and high-income earners would likely benefit from directing some of their savings into a life annuity.  Ninety-seven percent of Canadians say they want some of their retirement income guaranteed, according to The Sun Life Canadian Unretirement Index Report

An annuity can help you cover your basic retirement expenses, no matter how long you live. Or it can replace the fixed income portion of your investment portfolio with a much higher cash payout.  You can then focus on the retirement lifestyle that makes you truly happy.

Read: Surprise!  Annuities Beat RRIFs

Payout annuities can provide the highest level of guaranteed monthly income in retirement, and deliver protection from market volatility.  (Click here to download some sample Annuity quotes.)  But most people (62% of Canadians) don’t understand how they work.  The following video provides a primer as to how annuities work: 

Annuities: suitability and benefits

  • Annuities provide an income stream or “paycheque” that is guaranteed for life in return for one or more premiums paid to an insurance company
  • Immediate annuities are suitable for ages 60 and over.  You can begin your “paycheque” immediately.  Buying an annuity is like creating your own personal pension plan
  • Annuities are available with many options such as cash refund, guaranteed number of payments to heirs if you pass away, indexed, and joint last to die
  • You can create an annuity “ladder” by purchasing several spread over several years.
  • An annuity can be combined with an insurance policy to ensure that money is left behind for heirs
  • Annuities can be purchased with RRSP or RRIF money, or with non-registered funds.  If the premium is paid with non-registered funds, these annuities provide very tax-efficient income – with only about 10% to 20% of the income taxable, depending on the circumstances.  By comparison, 100% of the income from GICs and bonds is taxable. 

Myth: I can’t invest in a life annuity because I won’t have access to my money.

Generally, it is best to include a life annuity as only a portion of your retirement income portfolio. Calculate your basic expenses such as food, shelter and clothing required at retirement and subtract your expected CPP and OAS and other permanent sources of retirement income. That will help you calculate how much income you will need from a life annuity to cover the rest of your basic expenses. Creating an investment portfolio with a mix of products, including at least one annuity, allows other products to provide growth and access to money. As a good place to start, you could think about having 25% of your retirement income come from a life annuity.

Myth: I’m not confident I’ll receive my principal back.

How long does it take before you actually get your principal back when you buy an annuity?
The average life expectancies of 65-year-old Canadians are age 84 for men and age 87 for women. A 65-year old man would break even at approximately age 80 or in 15.3 years from the time he purchased the annuity. After you break even, your life annuity payments continue for as long as you live. Most people choose a guarantee period to cover the possibility of dying before breaking even. In other words, if a 15-year guarantee is chosen in the case above, you or your heirs will receive payments for 15 years, even if you die sooner. The break-even point occurs sooner with no guarantee period. Another option is a cash refund annuity, which provides a lump sum to your heirs upon your death if you have not yet received the amount you originally invested in the annuity.

Purchases of annuities are rising – and for good reason

Purchases of life annuities grew by 23 percent in 2014 in Canada, compared to last year. This shows that clients are discovering the benefits of life annuities in retirement portfolios. Canadians are living longer, so they need their retirement income to last longer.
I can show you how a life annuity can help form the foundation of your retirement income portfolio.  Call me for a free quotation.  or or email me at 

7 things that affect annuity income

Your annuity income is calculated at the time you buy the annuity. It’s based on a number of factors. The most important ones are your life expectancy and interest rates. If you’re buying a life annuity, the insurance company uses insurance tables to project how long you are likely to live.  Factors that will affect your annuity income.  

1. Your age

The older you are when you buy the annuity, the higher your annuity payments will be. That’s because you’re not expected to live as long.  The best time to buy an annuity is between the age of 60 and 71.  The older you are, the more that your age affects the rate you will get. 

2. Current interest rates

If interest rates are high when you buy your annuity, your annuity payments will be higher than if interest rates were low. That’s because the financial institution predicts it can earn more by investing your money.  The older you get, the less important the interest rate is in determining your payout, compared to the importance of your age. And as people are living longer, the effect of higher future interest rates may be offset by lower rates due to increased life expectancy.  One strategy that can be used to mitigate this effect is to ladder your purchase of annuities – in other words – buy several annuities over a period of several years. 

3. Your gender
Women get less money than men of the same age because they are expected to live longer.

4. The amount you deposit

The more money you put into your annuity, the more you get back as income.

5. The length of time the payments are guaranteed

 If you have a life annuity, you can arrange for your annuity payments to continue to your spouse, your dependent children, 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. The options you add​

You get the highest income with a basic annuity that covers only you. Any options you add (like a joint-and-last survivor option) will lower the amount of your payments. That’s because these extras increase the costs to the insurance company.
If interest rates are low when it’s time to convert your RRSP into an income option, you may want to delay buying an annuity. Instead, you can open a RRIF.  You can then use your RRIF to buy an annuity, or you can consider laddering your annuities as described earlier.

7. If you have a serious medical condition

Some life annuity providers will also factor poor health into an annuity quote if you have a serious medical condition. This means your annuity payments will be higher because your life expectancy is shorter.

Paying tax on your annuity income:

If you buy an annuity with money from a registered plan

If you buy an annuity with money from a pension plan, RRSP, or RRIF, your annuity payments will be fully taxed. That’s because you’re buying the annuity with pre-tax dollars.

If you buy an annuity with non-registered money

You’ll only pay tax on a portion of the payments you receive. That’s because you have already paid tax on this money. Here’s how it works:
  • To make your regular payments, the annuity provider pays out some of the income it earns investing your money, together with some of your original principal.
  • In the early years of your annuity, the Canada Revenue Agency (CRA) considers most of the income you get as interest for tax purposes. That means it will be fully taxed.
  • In the later years, the income you receive is mostly from your principal. Since you have already paid tax on that money, your taxes go down over time.

Deferring tax on annuity income

One way to defer paying tax on your annuity income is to buy a prescribed annuity with after-tax money. The annuity provider will include the same amount of principal and interest for each payment. This evens out the portion of your payment that is subject to tax, and means you pay less tax in the early years.

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