What is an annuity?

An annuity is the exchange of a lump sum of money paid to an insurance company which in turn contracts to pay a stream of periodic income to you either for your lifetime or for a specified period of time. The lump sum of money may come from non-registered funds from regular savings or RRSP.

Annuities are locked-in contracts and cannot be changed once they are set in place. You can purchase annuities in various forms. You may choose a fixed term [Term Certain] so that income is payable to your for a certain number of years or you may choose a life pay annuity which will pay you for the rest of your life, no matter how long that is. A person may choose a fixed term annuity with regular savings to take advantage of preferred taxation over a set period of time. Using RRSP money restricts the payment period for a term certain annuity to your age 90 only. No other payment periods are allowed for a term certain annuity purchased with registered funds.

Canadian annuities have insurance protection, so that up to $2,000 per month in payments is protected 100%. Above $2,000 per month the protection is limited to 85% of the payment amount. You can purchase an annuity up to your age 90. Financial planners say the sweet spot for this product is when someone is nearing retirement or is already in retirement. They caution it’s not a good idea to tie up all your money in an annuity, but to make it part of a diversified retirement strategy. Make sure you understand exactly what’s entailed in the annuity you choose.