What are annuities?

Annuities are another option for turning your retirement savings into income. They provide a guaranteed income for a defined period, alleviate ongoing investment risk, and require no investment management by you.

An annuity is a contract you sign with a life insurance company. Under the terms of this contract, you make a lump-sum payment to the insurer – from your defined contribution pension plan, RRSP, RRIF, LIF, LRIF, prescribed RRIF (PRRIF), deferred profit sharing plan (DPSP), or non-registered savings.

In return for this one-time payment, you receive a guaranteed income stream (like a pension) payable for a specified period or as long as you live. Depending on the type of annuity you choose, the payments may continue to your spouse or other beneficiary after your death.

The actual monthly income you receive from your annuity will depend on a number of factors, including:

  • The amount of money used to purchase the annuity. The more money you convert, the larger your income will be. For example, $500,000 will buy you a much larger annuity than $100,000.
  • Your age. Generally speaking, the older you are when you start to receive your annuity, the higher your annuity income will be. Younger retirees receive less annuity income each month because they’re expected to live longer.
  • The type of annuity you purchase. Different annuities offer different features. Some features are quite valuable and, in exchange, result in a lower monthly income.
  • The interest rates in effect at the time you annuitize (convert) your savings. Generally speaking, the interest rate used at the time of conversion is fixed for the lifetime of your annuity payments. If interest rates are low, your income will be lower than you might hope. If interest rates are high when you make the purchase, the annuity income will be higher. Once the annuity is purchased, the payments are fixed and the contract usually can’t be cancelled or amended.

Payments from annuities purchased with funds from a registered plan are 100 per cent taxable, while only a portion of those purchased with non-registered funds is taxable.