Annuities

An annuity converts a lump sum into a guaranteed income stream.

• By when payments start:
• Immediate annuity — payments begin almost immediately (within one month of purchase). For clients already in retirement needing current income.
• Deferred annuity — accumulates for a period before payments begin. For pre-retirement savings.

• By how long payments last:
• Life annuity — pays for as long as the annuitant lives. Addresses longevity risk directly. If annuitant dies early, remaining capital stays with insurer.
• Term certain annuity — pays for a fixed period (e.g. 10, 15 years). If annuitant dies, payments continue to beneficiary for the remaining term.
• Life annuity with guaranteed period — pays for life, but guarantees a minimum number of years. If annuitant dies before the period ends, payments continue to beneficiary.
• Joint and survivor annuity — pays for two lives (typically spouses). After first death, payments continue (often at 60%, 66⅔%, or 100%) to the survivor for life.

• Registered annuity (purchased with RRSP/RRIF funds):
• All payments are fully taxable as income — because the original contributions were tax-deductible, the full withdrawal is taxed.

• Non-registered annuity — accrual method:
• Interest accrues annually and is taxable each year, even if not received. Front-loaded — higher taxes in early years.

• Non-registered annuity — prescribed method:
• Available for certain annuities. Levels the taxable income over the payment period. Lower taxes in early years, higher in later years.
• Only the interest portion is taxable — the capital portion of each payment is a tax-free return of capital.
• More tax-efficient for retirees in lower brackets.

Prescribed annuity conditions: Must be a single-life or joint annuity, non-commutable (cannot be cashed in), and issued to an individual (not a corporation or trust).

• Back-to-back annuity strategy:
• Combines a prescribed annuity (maximizing after-tax income) with a life insurance policy (to replace the capital at death).
• The annuity generates maximum tax-efficient income
• The income (net of tax) funds the life insurance premiums
• At death, the life insurance replaces the annuity capital for the estate
• Result: higher lifetime cash flow AND estate preservation

Enhanced / Impaired life annuity: For individuals with serious health conditions that reduce life expectancy. Because the insurer expects fewer payments, it offers a higher monthly income. Significantly better value for eligible applicants.

Indexed annuity: Payments increase annually by a fixed % or CPI. Starting payment is lower than a non-indexed annuity but grows over time. Protects against inflation eroding purchasing power.