Annuities – how they work and why have one!

Retirement is near or perhaps you are already retired. It’s time for choices. How do you want to receive your income? Is an annuity a good choice?

Annuities can be considered as backwards, long-term mortgages with a couple of twists. Rather than a financial institution giving you a lump sum and you repay them monthly, the annuity does the opposite. The payment to you is normally a level fixed amount that is payable for as long as you live with a minimum payout guarantee. You also have the choice of having payments continue for as long as at least one person is alive in the case of joint annuities.

Annuities can be purchased with both registered and non-registered money. If purchased with registered funds, the payments are fully taxable to you. If you purchase the annuity with non-registered money, then only a small portion will be taxed – most of it will be tax-free.

So what is the attraction of an annuity?
 Guaranteed income for your lifetime (or the lifetime of 2 people for joint annuities)
 You cannot outlive your money
 You want to minimise your income tax payable (from non-registered funds called “Prescribed Annuities”) compared to other investments such as mutual funds or GICs
 You do not have to worry about the ups and downs of investment markets – no management needed
 You want to minimise the impact of lifestyle income reducing your OAS payments under the clawback rules in the Income Tax Act
 The principal of the annuity is protected from claims by your creditors
 You can name a beneficiary (or beneficiaries) for the remaining payments if you pass away before the end of the guaranteed period

Nothing is perfect, so what are other considerations?
 Once purchased, it cannot be cashed
 You cannot change the level of income or other terms after it is purchased
 You no longer have control of the money or how it is to be invested or managed

Some of the choices you will need to make include:
o Single life or joint life?
o Do you want a guaranteed payment period and if so, for how long?
o If you chose a guaranteed payment period, who should be the beneficiary if you pass away before the end of that period?
o Do you want level or increasing payments?
o Should you replace the capital used to purchase the annuity with life insurance so your heirs can still get the full value of your estate?

Could an annuity be the best choice for you?

Ian Whiting

Ian R. Whiting CD, CFP, CLU, CH.F.C., FLMI (FS), ACS, AIAA, AALU With more than 40-years of experience in the industry, Ian has qualified 3 times for MDRT, completed LUATC in 1979, the LUAC Financial Planning Skills Course and attended numerous Schools in Agency Management and Sales Management through LIMRA. He obtained his CLU in 1987 while also completed his IFIC qualification and completed his Fellowship in the Life Management Institute with a specialty in Financial Services in 1988. In 1989, he completed qualifications for his Chartered Financial Consultant designation. In 1992, he qualified as an Associate of the Academy of Life Underwriters (Head Office underwriter qualification) and in 1993 he completed his Associate, Customer Service designation program through LOMA. In 1997, he qualified as a CFP and also completed his courses and exams to obtain the Associate, Insurance Agency Administration designation. In 1999, he completed the study and examinations to qualify as a Trading Officer, Partner and Director for Mutual Funds with the BC Securities Commission. As a result, he is also qualified as both a Branch Compliance Manager and Head Office/Provincial Compliance Officer. He served for nearly 18 years with the Canadian Forces (Air) Reserve (reaching the rank of Captain) primarily working with Air Cadets and was award the Canadian Forces Decoration (CD) in 1982. Long known as a maverick and forward thinker in the financial services world, Ian enjoys the challenge of learning new material and planning for the future evolution of his chosen profession.