It's Your Money  

Annuities deserve a second look

The case for annuities

Canadians looking for stable retirement income should consider annuities again now that interest rates are higher.

An annuity is an investment product that provides a guaranteed income stream for life or a set period, in exchange for a lump sum or periodic payments. With higher interest rates, annuities can provide better payouts, making them an attractive option for retirees who want to secure their financial future.

The past few years have been tough for annuity buyers, as interest rates have been at historic lows. This meant that annuity payouts were lower, making them less appealing as a retirement income solution. However, now that we’re in a higher rate environment, these solutions are worth a second look.

One of the biggest advantages of annuities is that they provide guaranteed income for life. This means that retirees don't have to worry about market fluctuations, economic uncertainty, or longevity risk. Annuities can also be tax-efficient, as some income is considered a return of capital and is therefore not subject to taxes until withdrawn.

Another advantage of annuities is that they offer a range of options to suit different needs. For example, retirees can choose between a single life annuity, which provides income for the rest of their life, or a joint and survivor annuity, which provides income for the lives of both the retiree and their spouse.

There are also fixed-term annuities that provide income for a set period, and inflation-adjusted annuities that protect against rising living costs. But the more “perks” or guarantees you add mean a lower monthly payment amount.

As interest rates continue to rise, annuities can provide even better payouts, making them a more attractive option for retirees. For example, a 65-year-old Canadian man who invests $100,000 in a single life annuity could receive an annual income of around $6,000 based on current interest rates. If interest rates were two per cent higher, that same annuity could provide an annual income of around $7,000.

Of course, annuities are not for everyone. They require a significant upfront investment, and once the money is invested, it cannot be accessed without penalties or fees. Annuities are also not very flexible, and once the contract is signed, the terms cannot be changed. Additionally, annuities may not keep pace with inflation, meaning that the purchasing power of the income may decrease over time.

It's important for Canadians to consider their individual circumstances before deciding whether or not to invest in an annuity. For those who have other sources of retirement income, such as pensions or investments, annuities may not be necessary. However, for those who want the peace of mind of a guaranteed income stream for life, annuities may be a good option.

Another consideration is the current state of the economy. While interest rates are currently higher, they could drop again in the future. This means that annuity payouts could decrease as well if they’re linked to inflation.

It's important to work with a professional financial planner to understand the risks and benefits of annuities and to determine whether they are the right option for your retirement income plan.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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