Annuities are a type of investment that can provide you with guaranteed income for the rest of your life.
There are many types of annuities in Canada, and they come with different features. Which one is best for you? Which one should you get?
This easy-to-understand guide will explain the different types of annuities. In the end, you’ll know which one is right for you and your situation.
Types Of Annuities
All types of annuities have something in common: you pay the insurance company a lump sum amount. In exchange, you get a stream of payments. However, the amount of income you get depends on the type of annuity you choose.
The types of annuities differ depending on the:
- Length of payments
- Guarantee period
- Type of account
- Tax treatment of payments
- Timing of payments
- Life the annuity is based on
- Amount of payment
Length of payments
1. Life annuity
As the name suggests, a life annuity provides income for your entire life, no matter how long you live. Once you die, the insurance company’s obligation ends, and payments stop.
Life annuities are popular for low-risk people like retirees who want a higher income than what they will get from a GIC or bond. They are also more tax-advantageous than GICs because only a small part of the income you receive is taxable.
2. Term certain annuity
A term certain annuity provides guaranteed income payments for a set period of time. If you die before the end of that period, the payments continue to your beneficiary.
Because term certain annuities don’t pay out for your whole life, you still run the risk of outliving your savings. So while a term certain annuity isn’t the best choice for retirement, it’s a popular option to use as a stopgap measure. For example, if you’re retired but haven’t started receiving your pension yet, you can use a term certain annuity to bridge the gap from now until then.
Guarantee period
3. Guaranteed annuity
You can choose a guarantee period for your annuity. If you die before the guarantee period is over, the payments continue to your loved ones until the guarantee ends.
If you’re worried that payments will stop because you might have a short life expectancy, a guaranteed annuity is right for you.
4. Non-guaranteed annuity
A non-guaranteed annuity means that the income stops when you die. Because it’s a riskier choice for you, the insurance company will pay you a higher income compared to an annuity with a guarantee period.
Type of account
5. Registered annuity
A registered annuity is when you use an RRSP, RRIF, or other registered accounts to buy an annuity. Since you haven’t paid tax on these funds yet, the entire payment you receive from a registered annuity is taxable.
6. Non-registered annuity
On the other hand, a non-registered annuity is when you buy an annuity with non-registered funds. Since each payment you receive from a non-registered annuity is comprised of interest and tax-free principal, you’ll only have to pay tax on the interest.
Tax treatment of payments
7. Non-prescribed annuity
With a non-prescribed annuity, a larger part of the payments you receive in the early years is interest. As time goes by, the interest component drops. As a result, you pay more tax early on and less tax later.
8. Prescribed annuity
A prescribed annuity has tax advantages over a non-prescribed one. With prescribed taxation, payments have a blend of interest and principal every year that keeps taxes low from beginning to end. This results in a level amount of taxable income every year.
Because a prescribed annuity gives you preferential tax treatment compared to a non-prescribed annuity, the former will pay you a higher after-tax income.
Also, if you’re getting clawed back on your Old Age Security pension, a prescribed annuity will reduce the clawback since only a small part of the payment is taxable income.
Timing of payments
9. Immediate annuity
The payments in an immediate annuity begin within one year after you make the deposit. If you’re ready to receive income, you’ll want to choose this option.
If you want to increase your retirement income while leaving an inheritance for your loved ones, you should look into the insured annuity concept. Executing the insured annuity will require an immediate annuity.
10. Deferred annuity
With a deferred annuity, the payments begin at least one year after you buy it. During this time, your deposit grows based on the current interest rate. When you start taking income from the annuity, you will receive a larger amount.
If you don’t need income right away and want to protect your investment until you’re ready to draw upon it, you’ll want to buy a deferred annuity.
Life the annuity is based on
11. Single life annuity
In a single life annuity, the payments are based on your life only. When you die, payments stop unless you have a guarantee period on the annuity.
12. Joint life annuity
With a joint life annuity, the payments are based on two lives, usually you and your spouse. When the first person passes away, the survivor will continue to receive payments from the annuity. That’s why joint life annuities pay a lower amount than single life annuities.
You can also choose to have payments reduce when the first person dies. This results in higher payments while both people are still alive.
Joint annuities are the perfect option for the lifetime gift annuity strategy, where you provide your grandchild with the gift of an income for life.
Amount of payment
13. Level annuity
With a level annuity, payments remain level throughout your life. While this level of income may be enough in the beginning, it might not be enough in the future. That’s because inflation will reduce your purchasing power over time.
14. Indexed annuity
If you choose an indexed annuity, payments start out lower than a level annuity. However, your income increases every year. Eventually, the income from an indexed annuity will be higher than a level annuity.
Because an indexed annuity helps you maintain your purchasing power over time, it’s best to get it if you expect to live a long time.
15. Variable annuity
A variable annuity is one where the payments are linked to the market. You can choose your investment like an equity or balanced fund. If the market performs well, you’ll receive higher payments.
Variable annuities guarantee a minimum level of income that you can expect to receive. So even if the market tanks, you know you won’t lose your entire investment. One of the downsides to this guarantee is that variable annuities have higher fees which lower your returns.
However, it’s a good way to get guaranteed income for life while still taking advantage of potential stock market gains.
Which Type Of Annuity Should You Get?
Now that you know about the different types of annuities you can get, which ones do you think is right for your retirement?
Do you want the security of a guaranteed annuity? Or do you prefer the higher income from a life annuity without a guarantee?
Unsure of which one to get? We can help you find the right one for you and give you some quotes so you know how much income you’ll receive with each one.
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1 Comment
Looking for fully guaranteed fixed type annuity for my name (age 69) and my son’s name (age 32 years) for maximum period