By Canada Life Investment Management | Oct. 4, 2023
With high interest rates and soaring inflation, it can be challenging to find an investment option that’ll help Canadians reach their goals without making them feel like they’re walking a tightrope.
Annuities are often misunderstood and overlooked. But we’ve got three compelling reasons why you should consider them in today’s economic climate.
1. A secure and predictable income
For Canadians entering retirement, there's perhaps nothing more comforting than knowing they’ll have a steady cash flow to rely on. “As we witness the surge in interest rates, annuities have become more comprehensive and generous, making them an incredibly versatile and beneficial option in various scenarios,” says John Yanchus, Director at Canada Life’s Tax and Estate Planning Group.
In today’s high-rate environment, fixed annuities can offer a guaranteed rate of return that’s typically higher than what traditional savings accounts provide. In many scenarios, yields from annuities surpass those of guaranteed investment certificates (GICs) on an after-tax basis. They can provide peace of mind by guaranteeing consistent cash flow and acting as a hedge against inflation, even in uncertain or volatile market conditions.
2. Customizable and adaptable options
The notion that annuities are inflexible couldn't be further from the truth. Modern annuities offer an impressive range of options to suit diverse client needs.
For instance, investors can opt for “return-of-premium” options that protect their initial investment. These can ensure that the principal amount is available to beneficiaries when the annuitant passes, either through a one-time payment or continued payments.
Annuities can also be indexed to inflation with a variety of options, providing an increasing income stream over time. For example, short-term rate-protection increases annuity payments at the six- or 12-month anniversary of the policy if Canada’s 10-year bond rate is higher than expected.
Cashable annuities are a great option when a client’s situation demands more flexibility and liquidity. They allow the withdrawal of part or all of the guaranteed portion of the investment, under certain conditions.
3. Tax-deferred growth and estate planning benefits
Like other registered accounts, registered annuities offer tax-deferred growth along with their unique benefits. Leaving earnings untouched until they are withdrawn can lead to significant tax advantages, especially if the client is in a lower tax bracket when they retire.
It’s no secret that annuities are a powerful tool for estate planning. Features like beneficiary designations and settlement options offer a level of control over how assets are distributed, providing a way to financially protect loved ones and even manage the disbursement to beneficiaries who may not be financially responsible.
Thinking outside the box
With guaranteed income streams, customizable features and tax advantages, annuities may offer financial security and peace of mind that’s hard to match. “I encourage advisors to think beyond conventional routes to explore different areas where these can be used or structured for maximum advantage,” Yanchus says. There are numerous strategies that might be overlooked, such as the ability to defer annuity payments for up to 10 years, which offers more income-planning options. For those with more assets than they need, deferred annuities can not only help them but provide for loved ones.
Uncertain times call for innovative thinking and creative financial planning. Now, more than ever, is the time to embrace annuities as a cornerstone of a well-rounded financial strategy.
The views expressed in this commentary are current as of the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice.
Canada Life and design, Canada Life Investment Management and design, and other marks followed by the TM symbol at first time of use are trademarks of The Canada Life Assurance Company (“Canada Life”). Other marks displayed in this piece are trademarks of a third party, and used with permission or under license. Canada Life Investment Management Ltd. is a subsidiary of Canada Life.