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Questions and Answers

Why are annuities so popular today?

Pensioner’s who depend on their savings for their retirement income are looking for higher returns than traditional GIC’s and bonds. An annuity can also provide the guarantee that you cannot outlive your retirement income.

Q. How safe is my annuity?

Annuities are among the safest investments around because they are financially backed by Canada’s insurance companies, which in turn are backed by an organization called Assuris (www.assuris.ca). Assuris is the not for profit organization that protects Canadian policyholders in the event that their member life insurance company should fail.

Assuris' has a monthly income protection for annuities. If your life insurance company fails, your payout annuity policy will be transferred to a solvent company. On transfer, Assuris guarantees that you will retain up to $5,000 per month or 90% of the promised monthly income benefit, whichever is higher. Assuris is funded by the life insurance industry and endorsed by the Canadian government.

Q. How much of my retirement portfolio should I allocate to an annuity?

There really is no set rule. A lot will depend on your age, net worth, personal financial and retirement situation and what you want to accomplish. With this strategy you give up liquidity and some flexibility, therefore it should be an important component of a larger investment plan. You should always have enough cash on hand for emergencies and other opportunities.

Q. What are some of the important factors to consider before you purchase a annuity?

The annuity is permanent. You are giving up a lump sum of cash for a guaranteed income stream. Once it is implemented it cannot be changed. The annuity is not liquid. No access to your funds other than the income stream.

Q. Why isn’t my bank or investment advisor telling me about annuities?

Maybe they’re not licenced to sell annuities. Could also be commission structure, especially trailer fees could be the reason. They would rather sell you an investment such as a mutual funds which means bigger up front and trailer fee commissions attached. The more money you hold in an investment fund the higher the trailer commissions for your bank or investment advisor. Regardless if your investment makes or loses money, your bank and investment advisor continue to cash in on the trailer fees. Annuities pay a one-time commission with no trailer fees for the agent who sold you the annuity.

Q. Interest rates are low. Should I wait for interest rates to go up before I purchase an annuity?

Interest rates have been low in Canada since the early 1990’s. Interest rates partially affect annuity prices. Each insurer calculates their own annuity rates using the following criteria:

  • the amount of money used to purchase the annuity
  • the type of life annuity purchased
  • current interest rates
  • the ages of the annuitant(s)
  • the present long-term bond rates
  • expense and mortality experience of the company
  • insurance credits

Q. What’s the difference between registered annuities and non-registered annuities?

The difference is the fund type, meaning the source of the funds used to buy the annuity. If the funds being used to purchase the annuity are coming from registered money such as; RRSPs, RRIFs, and registered pension plans such as; RPP’s, DPSPs, LIRAs the annuity income received will be fully taxable. If the funds are not from registered sources, then they are considered non-registered funds and have distinct tax advantages

Q. How are registered and non-registered annuities taxed?

The income from a non-registered annuity is taxed differently from a registered annuity. If the annuity is purchased with registered funds the annuity income is fully taxable. If the annuity is purchased with non-registered funds, the taxation can be either accrual or prescribed.

The accrual method is based solely on interest earned. Since the principal is high in the early years, the interest portion of the annuity will be also be high; therefore, a higher taxable portion is payable in the beginning. As the amount of the annuity principal goes down with each payment received, the interest and the tax payable decrease.

Alternatively, annuities can be taxed on a prescribed basis. Annuity payments will be a blend of interest and principal over the life of the contract. This spreads out the tax payable evenly every year. For many individuals, a prescribed annuity is the preferred taxation choice.

Q. What are the key benefits of a prescribed annuity?

  • Everything is fully guaranteed
  • Preferential tax treatment of annuity income which could increase your Old Age Security (OAS) payments.
  • Maximizing your retirement income
  • Qualifies for the pension tax credit and income splitting
  • Free from worry about future interest rates because the income stream is guaranteed for life.

Q. What qualifies as a prescribed annuity?

An annuity contract must qualify for prescribed tax treatment and is defined in Regulation 304(1) of the Income Tax Act. It can be exempt of accrual taxation if the following conditions are met:

  • The policyholder must also be the annuitant. An annuitant is the person whose life the contract is based on.
  • A joint life annuity is permitted subject to certain variables. Joint life usually refers to husband and wife to receive income payments, but there are other combinations available.
  • The annuity must be non-commutable and non-transferable--this means it is a permanent contract for the life of the individual and can not be cashed in or transferred to another party, either as a gift or for consideration.
  • Annuity payments must start by December 31 of the year following the purchase date.
  • Annuity payments must be equal, made regularly, at least annually, and cannot be inflation protected (indexed).
  • Annuity payments can be for life or a certain term (term certain) as long as the term does not exceed the annuitant's 91st birthday.
  • The policyholder can also be a testamentary or spousal trust.

Q. What are the 5 important questions to ask yourself that will determine if prescribed annuities are right for you?

  • Are you using non-registered fixed income investments to supplement your retirement income?
  • Are guarantees important to you?
  • Are you in a high marginal tax bracket?
  • Do you want to maximize your retirement income?
  • Are you getting clawed-back on your Old Age Security?

Q. Why is having a prescribed annuity a tax-effective way to die?

You have been taxed your whole life, why pay taxes upon death? It is said that your biggest tax bill with be your final tax return. By purchasing a prescribed annuity, the income ends on death and all your assets in the annuity equal zero. That means zero assets for Revenue Canada to tax you on your final tax return. If you want to leave money to your loved ones, then life insurance is the best vehicle for that purpose (visit www.corporatelifeinsurance.ca) the death benefit goes directly to your beneficiary tax free. If you’re looking to die broke and leave your loved ones a large chunk of your hard earned assets, then this strategy is right for you.

Q. What is the enormous mistake seniors make when investing in GIC’s?

Investing in GIC’s creates interest income. Interest income is taxed at the highest rate compared to dividend or capital gains income.

Q. Is my annuity at risk from inflation?

An annuity can be purchased with an inflation protection index.

Q. What is the best age to apply for an annuity?

Anywhere from ages 55 to 85 and some instances beyond.

Q. What is the Golden Rule when buying an annuity?

Shop the annuity market!!

Q. How can I get the best annuity rates on the market?

Give us a call. We shop the annuity and insurance markets daily for best rates. Or to get your free quote click here.