How an annuity can work for you in retirement

Key takeaways

Annuities can help you step into retirement with the certainty of a steady income stream.
There are several factors that will determine how much money you’ll receive from your annuity.
Annuities can help provide continuing income in the event of the death of a spouse.

What is an annuity?

An annuity is a contract with a life insurance company. You provide them with a lump-sum payment from your defined contribution pension plan, RRSP, RRIF, LIF, LRIF, prescribed RRIF (PRRIF), deferred profit sharing plan (DPSP), or non-registered savings.

In return, 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.

Why buy an annuity in retirement?

It’s well-known that Canadians are living longer. The latest report from Statistics CanadaOpens a new website in a new window released in 2019, found that the average life expectancy in Canada is 79.9 years for men and 84 years for women.

This makes it important to set up a part of your nest egg in a way that can give you guaranteed cash flow for the rest of your life.

Guarantee retirement income with an annuity

Building a part of your retirement nest egg with an income annuity can help you cover most of your basic living expenses in retirement. Then the other part of your money can be invested in funds that have the chance to grow.

The amount of money used to buy 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.

The actual monthly income you receive from your annuity will depend on several factors.

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.

Interest rates when you convert your savings

Typically, 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 changed.

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

Is an annuity for you?

An annuity is a great choice to get a steady income during retirement for these reasons:

They can give you excellent value even in low interest rate environments.
They provide an expected cash flow with no income fluctuation regardless of whether markets are up or down.
They can help to continue to provide income in the event of the death of a spouse.
They protect against outliving your savings.

What's next?

Now that you understand more about annuities, hopefully you can look forward to a secure financial paycheque for as long as you live.

If you’re a member of a Canada Life employer-sponsored savings plan, we have licensed professionals who can assist you. Contact Canada Life to learn more.

You may also want to contact your advisor to:

Determine when you want to retire.
Determine how much regular income you’ll need.
Determine the type of annuity that will work best for your situation.
Confirm all your sources of retirement income.

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors. 