Income From Annuities

With current fluctuations in the stock markets, Canadians are seeking out annuities to provide stable income in retirement. The compounding affect of continuing low interest rates and aging population has challenged annuity providers to keep up the rates of return on their annuity products. Pension plans experience similar challenges as the number of pensioners receiving pension income increases.

Annuities create a risk free guaranteed level of income for life and guard against the risk of out living your retirement income. The amount of an annuity payment on a monthly basis is correlated to the yield the insurer earns on its investment capital pool, which includes long term bonds , i.e. 10 and 30 year Government of Canada Bonds.

Longevity risk and greater life expectancies have influenced the issuers of annuities issued in the 1990’s when interest rates were much higher. This has forced insurers to continue to make payments to the annuitant or pensioner beyond their actuarial assumptions in an environment of low interest rates. From the clients perspective a long term promise to pay income from an annuity is appealing.

Annuities have other benefits also. The payments from an annuity are eligible for income splitting which is particularly helpful when one partner is in a higher income tax bracket. The transfer of annuity income from one taxpayer to other results in a lower combined income tax bracket.

Prescribed annuities offer an element of tax relief. A prescribed annuity, purchased with non registered funds (not RRSP/RRIF or pension funds) receives a level tax which is applied to all payments even though in the early payout years the annuity investment will earn more interest. Prescribed annuities are very tax efficient.

Another feature of annuities is an option to include a guaranteed period of time (10/15 years) which ensures if the annuitant(s) or recipient(s) of the annuity payments dies, his or her spouse or named beneficiaries or estate will continue to receive payments until the end of the guaranteed period.

Annuities are often part of the retirement planning tool box and should be reviewed with your professional advisor to determine if annuities are appropriate to your personal retirement income strategy and your personal estate planning.