Everything else on this page is about accumulating money. This one is about turning it into an income you cannot outlive.
An annuity is simple in a way most financial products are not. You hand an insurance company a lump sum, and it pays you a fixed amount every month for the rest of your life, or for a set number of years. The payment does not move when the markets do. It arrives whether you are 70 or 100.
What you are buying is not a return. It is the removal of two risks: running out of money, and having to make investment decisions in your eighties.
The two kinds worth knowing about
A life annuity pays for as long as you live. Longer life, more total income. It is the only product that genuinely solves outliving your savings.
A term certain annuity pays for a fixed number of years — useful for bridging a gap, such as retiring at 62 and delaying CPP or Old Age Security to 70.
Both can be arranged jointly, so payments continue to a surviving spouse, and both can include a guarantee period so that if you die early, payments continue to your beneficiary for the remainder of that period. That guarantee is what answers the objection people always raise, which is the fair one below.
The honest objection
“What if I hand over $200,000 and die in two years?”
Without a guarantee period, the insurance company keeps the balance. That is the trade — it is the same pooling that lets the company keep paying someone who lives to 103.
With a guarantee period, or a joint arrangement with your spouse, that risk largely goes away, at the cost of a somewhat lower monthly payment. Most people I work with choose the guarantee. It is worth understanding the number before deciding, not after.
The second real trade-off: an annuity is irreversible, and the money is no longer available as a lump sum. That is why an annuity should almost never hold everything. Common sense is to annuitise enough to cover your fixed costs — property tax, utilities, groceries, insurance — and keep the rest liquid in a TFSA or RRIF for everything else.
Annuities and the age 71 deadline
By the end of the year you turn 71, an RRSP must be converted to a RRIF, an annuity, or a combination.
A RRIF gives you flexibility and leaves an estate, but the income depends on markets and on how long you live. An annuity gives certainty and no decisions. Splitting between the two — certainty for the bills, flexibility for everything else — is what most people actually want when the options are explained side by side.
This is a decision worth making at 68, not in December of the year you turn 71.
How annuity income is taxed
Money from a registered plan is fully taxable as income when it is paid out.
Non-registered money is treated differently, and better. A prescribed annuity spreads the taxable portion evenly across every payment, so a large part of each cheque is simply your own capital coming back and is not taxed at all. For a retiree watching Old Age Security clawback thresholds, the difference in taxable income compared with drawing from a non-registered portfolio can be significant.
Where this fits with everything else
Annuities are issued by insurance companies, like the segregated fund contracts used for the other plans on this site, and they carry the same estate advantage: payments to a named beneficiary during a guarantee period bypass probate.
If you are approaching retirement, the useful conversation is not “should I buy an annuity.” It is how much guaranteed income you need on top of CPP and OAS to cover the bills that arrive regardless — and then whether an annuity is the cheapest way to buy that certainty.
Common questions
Are annuity rates better when interest rates are higher?
Yes. Payments are priced partly off long-term interest rates, so the environment at the moment you buy matters and is locked in for life. Timing is worth a conversation.
Can I get my money back if I change my mind?
Generally no. That irreversibility is precisely why an annuity should be one part of a plan and not the whole of it.
What happens to my spouse if I die?
With a joint life annuity, payments continue to them, at either the full amount or a reduced percentage you choose at the outset.
Is the income protected if the insurance company fails?
Assuris provides protection for annuity payments up to defined limits, in the same way it does for other insurance contracts.
How much do I need to start?
It varies by insurer, but meaningful annuities generally start in the tens of thousands. I can run quotes across carriers before you commit to anything.
See all savings and investment options.
If you are within five years of retiring, the useful exercise is working out how much guaranteed income you actually need. Book a 15-minute conversation and we will do that arithmetic together.