Types of Annuities: A Guide to Understanding Your Retirement Income Options

Posted on by Tax Partners
31
Dec

Introduction

Key Takeaways

  • An annuity can provide a steady income stream during retirement.
  • Various types of annuities cater to different financial needs and goals.
  • Consumer protection agencies, like Assuris in Canada, help safeguard annuity policyholders.

What’s an Annuity?

An annuity is a financial product designed to convert a portion of your savings into regular income for a fixed period or for the rest of your life. It's a way to ensure steady cash flow during your retirement years.

How Does an Annuity Work?

  1. Determine Retirement Needs: Work with an advisor to estimate your required retirement income.
  2. Lump-Sum Payment: Make an upfront payment to purchase the annuity.
  3. Choose Payment Schedule: Decide whether to receive payments monthly, quarterly, semi-annually, or annually.
  4. Start Receiving Income: Payments begin either immediately or at a future date, as per your choice.

Types of Annuities

There are two primary types of annuities, each offering distinct benefits and considerations. Both can be immediate (start payments right away) or deferred (begin payments at a later date).

1. Life Annuity

  • Benefits:
    • Guarantees income for your lifetime, eliminating the risk of outliving your savings.
  • Risks:
    • If you pass away early, you may not receive the total amount you invested.
  • Adding optional features can reduce regular payment amounts.
  • Additional Options:
    • Joint and Survivor Annuity: Ensures income continues to a spouse or partner after your death.

2. Term-Certain Annuity

  • Benefits:
    • Provides guaranteed income for a specified period.
  • If you pass away before the term ends, your beneficiary or estate receives the remaining funds.
  • Risks:
    • Payments stop after the term ends, potentially leaving you without income if you live longer than expected.

Things to Consider Before Buying an Annuity

  1. When to Buy:
    • Do you need more income earlier in retirement for hobbies and travel?
  • Or would you prefer guaranteed income later for health care and other essentials?
  1. Other Income Sources:
    • Evaluate your retirement income from other sources like:
  • Employer pension plans.
  • Canada Pension Plan (CPP) or Quebec Pension Plan (QPP).
  • Old Age Security (OAS).
  • Personal savings or investments.
  1. Estate Planning:
    • If leaving money to beneficiaries or your estate is important, choose an annuity that aligns with your estate planning goals.
  1. Tax Implications:
    • Understand how the type of annuity you choose affects the amount of income tax on payments.

Annuity Protection

Consumer protection agencies, such as Assuris, offer safeguards for annuity policyholders if the provider goes out of business:

  • 100% Protection: Monthly payments up to $2,000.
  • 85% Protection: Monthly payments exceeding $2,000.

Cancelling or Changing Your Annuity

  • Generally Non-Changeable: An annuity is a contract, so terms cannot usually be altered, and refunds are not provided.
  • Limited Cancellation Period: Some contracts allow cancellations within a short timeframe after payments begin, but fees may apply.

What’s Next?

Now that you’re familiar with annuities, consider the following steps:

  1. Consult Your Financial Advisor: Discuss if an annuity fits into your retirement income strategy.
  2. Explore Options: Choose the type of annuity and additional features that align with your needs.
  3. Plan Payments: Decide when and how you’d like to start receiving income.

A well-chosen annuity can be an invaluable part of your retirement plan, providing you with financial security and peace of mind during your golden years.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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