The majority of Canadians work hard to accumulate a retirement fund and many are averse to exposing savings to unnecessary market risk after they retire.
In today’s prolonged low interest rate environment, immediate annuities are often dismissed or overlooked as a viable vehicle for providing retirement income. Perhaps they shouldn’t be.
An annuity is an investment that provides a guaranteed income stream for a set period of time or for the lifetime of the annuitant. While annuities may not be for everyone, for those trying to find a way to guarantee income in retirement Immediate Annuities may be the answer.
3 Retirement Risks to Avoid
Outliving Your Savings
No one wants to outlive their retirement fund or leave their surviving spouse without resources. An immediate life annuity either on a single life or a joint life basis could be the answer for those looking to ensure that their monthly living expenses are taken care of for the rest of their lives.
If you are a member of a company or government pension plan, you will have the option of structuring a regular pension income for this purpose and to select survivor options for your spouse.
If your retirement savings are in the form of a Registered Retirement Savings Plan, you have the option of converting your RRSP into a RRIF (Registered Retirement Income Fund) or purchasing an immediate life annuity. This must be done no later than age 71.
Market Risk and Volatility
While you are drawing income from your RRIF you remain invested for the undrawn balance. Seeking higher yields involves a measure of risk. A downturn in the market, such as what happened in 2008, could prove disastrous to a retirement plan. An immediate annuity is not subject to this market risk.
High Rates of Income Tax
The income you receive from a registered source (i.e. RRIF’s, pension, or registered immediate annuities) is all taxable.
You can use your non-registered savings (such as TFSA’s) to purchase a prescribed immediate annuity which will be taxed at a much lower rate than traditional income producing investments (such as GIC’s, bonds etc.).
There are a number of conditions to be met for an annuity to be prescribed, the main ones being:
Annuity income from a prescribed annuity is a blending of interest and return of capital. This results in less tax payable.
Changes are coming
Unfortunately, the advantage of prescribed annuities will be greatly reduced after January 1, 2017 as the government is changing the factors in determining the taxable portion of prescribed annuity income. Existing arrangements will be grandfathered meaning only new annuity purchases will be affected after this date.
Also, as of January 1, 2016, the only Testamentary Trusts that will be allowed to purchase a prescribed annuity are testamentary spouse or common-law partner trusts, or a Qualified Disability Trust.
8 Key Facts to Know About Immediate Annuities
If you or someone you know shares the concerns of protecting income throughout the retirement years, an immediate annuity might provide a solution to some of those concerns. Please feel free to share this information with your friends and family.