Annuities Update for Retirees: Creating A Personal Pension Plan

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In recent years, annuities have gained renewed appeal for retirees due to the shift in interest rates. This article explores annuities and why they could benefit your retirement income strategy. 

Understanding Annuities – Your Personal Pension Plan

An annuity is a contract with a life insurance company that provides a steady and guaranteed income stream in exchange for a lump sum payment. You can receive monthly, quarterly, or annual payments, allowing you to create your personalized pension plan from your savings.

Key Annuity Basics

You can fund your annuity with your Registered Retirement Savings Plan (RRSP) or non-registered savings. Here are some essential points to consider:

Typically, annuities are purchased from life insurance companies, and they guarantee income for a specified period, including the possibility of a lifetime income.

The income from annuities is almost always taxable, and various factors influence the amount you receive, such as the source of your capital (RRSP or cash), current interest rates, age, health, and the payment features you select.

The two most common types of annuities are:

Single Life Annuity: Guarantees income for your lifetime only.

Joint Life and Last Survivor Annuity: Ensures income for your lifetime and continues to your spouse or common-law partner after your passing.

You can customize your annuity by choosing additional features like a guaranteed death benefit period to your estate and annual indexing of payments. 

Keep in mind that the more features you add, the lower the income the annuity provides.

Benefits for Retirees

Annuities offer several advantages for retirees:

Longevity Protection: You won’t outlive your income.

Simplicity: As you age, you no longer have to make complex investment decisions.

Stable Income: You can predict your income with certainty.

Risk Reduction: The annuity provider takes on the investment risk.

Considerations and Potential Downsides

However, it’s essential to be aware of the downsides:

Lack of Liquidity: Annuities exchange your capital for lifetime income, limiting your access to your funds.

Inflexibility: Annuity decisions are usually irreversible, reducing flexibility if your financial needs change.

Inflation Risk: Unless you choose an option for annual payment increases, your income remains fixed, potentially eroding your purchasing power over time.

Estate Reduction: Annuities may reduce the value of your estate for the next generation.

Estimating Annuity Income

Here’s an estimate of a couple’s income from an indexed annuity for a lifetime income, reduced to 70% on the first death, at different ages and indexing rates.

At age 65: $100,000 purchase amount yields $6,894 annually (not indexed) or $5,476 annually indexed at 2.1%.

At age 71: $100,000 purchase amount results in $7,966 annually  (not indexed) or $6,599 annually indexed at 2.1%.

Please note that these figures are based on Sunlife Life annuity rates as of October 18, 2023, and may change.

Comparison to a GIC

In comparison to Guaranteed Investment Certificates (GICs), annuities can offer a compelling income solution for some of your savings. For instance, to achieve the same income an annuity provides for a couple aged 65 today, you would need a GIC with a fixed interest rate of 6.894% for the rest of your life.

Your Retirement Planning

In conclusion, securing your financial well-being during retirement or work-optional years is crucial. Annuities can be pivotal in ensuring a consistent income stream that aligns with your financial goals and dreams. 

It’s essential to understand that annuities don’t have to be an all-or-nothing proposition. By incorporating them alongside other income sources, such as CPP and OAS, you can establish a solid foundation of guaranteed income.

Working with a Certified Financial Planner CFP® professional is invaluable in exploring various annuity options, creating tailored strategies, and executing them efficiently. Seek guidance and stay knowledgeable to make well-informed decisions about your financial future.

Download our White Paper: Your Retirement Road Map: How to make the Transition to Retirement HERE.  

For more information, refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®.

For your FREE E-Copy of Preserving Wealth, CLICK HERE