Annuities have a strange reputation in Canada. Ask economists, actuaries or pension researchers and they will tell you that converting part of your savings into a guaranteed lifetime income is one of the smartest and most efficient ways to reduce pension risk.
Finance professor Moshe Milevsky has been writing about this for twenty years. And Fred Vettese – one of Canada’s most widely read pension experts – has repeatedly said that for many retirees, the math behind an annuity is “pretty compelling,” especially for those without a defined pension.
Yet almost no one buys one.
The percentage of Canadians who voluntarily purchase an annuity is astonishingly low. Vettese estimates that “only about five percent of people who can buy an annuity actually do so.”
And Bonnie-Jeanne MacDonald, in her research on pooled risk retirement income, notes that retirees “are strongly opposed to voluntary annuities because they want to maintain control over their savings.” This line nicely illustrates one of the biggest behavioral hurdles: loss of liquidity and the fear of giving up assets.
So if annuities solve real retirement problems, why do we avoid them? And does the product still deserve a place in retirement planning in a country like Canada, where you can’t even buy a real inflation-indexed annuity?
Let’s break it down.
What an annuity actually does
An annuity is the cleanest variant of longevity insurance. You transfer a fixed amount to an insurer and they guarantee you a monthly income for life. If you live to be 100, the insurer will pay you. If the stock markets crash, you still get paid. If you’re 87 and never want to look at a portfolio again, the income will keep flowing.
Annuities neutralize two risks that haunt retirees:
- Longevity risk: outliving your money.
- Sequence of Return Risk: The danger that poor early retirement markets will permanently undermine a portfolio.
Economists like annuities because they transfer both risks to an insurer in exchange for a predictable income stream. But retirees don’t think like economists. And that’s where the puzzle begins.
Why Canadians rarely buy annuities
- Loss of liquidity and control
This is the big one. Once the money is in, it’s gone. You can’t withdraw it, change your mind, or withdraw a lump sum for a home renovation or medical need. Retirees are concerned about giving up optional features (understandably).
- Motives for donations
A large number of retirees want to leave something behind for children or a good cause. A normal annuity usually leaves nothing. Even adding refund features reduces payouts.
- Fear of dying early
Behaviorally, people overestimate the risk of dying early and underestimate the risk of living to 92 and needing income. MacDonald’s research shows that this emotional bias is pervasive: retirees “want to stay in control,” even if that control makes their income more vulnerable.
- Complexity and low product awareness
Annuities are simple in theory, but intimidating in practice. Most Canadians don’t understand how they work or why prices fluctuate.
- The interest rate effect
Years of low interest rates made annuity payouts seem small. Even now, despite better returns, retirees remember the low interest rate era and assume annuities are a bad deal.
- Advisor bias
Some advisors rarely bring them up. Some do not have an insurance license. Others prefer portfolio-based solutions. If advisors don’t bring up the subject, retirees won’t either.
- The Canadian mistake: no inflation-indexed annuities
Ben Felix of PWL Capital has highlighted this point before. In Canada you can’t buy a true inflation-linked annuity that rises with the CPI.
That is a serious limitation. A fixed dollar payment feels safe at age 65, but can lose half its purchasing power at age 85 in a world with even modest inflation.
This issue alone explains a large part of the annuity puzzle in Canada. A retiree wants a guaranteed income, but a guaranteed income that decreases every year doesn’t feel like a real win.
ALDAs
A quick note about ALDAs or Advanced Life Deferred Annuities. Ottawa introduced ALDAs in 2020 as a way for retirees to insure only the late portion of their retirement, with income not kicking in until age 85 and up to 25 percent of registered assets (up to a lifetime dollar limit) allowed to be used to finance the purchase.
In theory, ALDAs are a smart form of longevity insurance. In practice, the market is extremely limited: in 2025, Desjardins is the only major insurer that offers an ALDA product. They remain a niche option, useful for people who already have a well-covered income for early and medium retirement and simply want a safety net for older ages.
Canadian-specific pitfalls
Here’s what retirees need to know about annuities in Canada:
Inflation risk
A fixed payment annuity erodes over time. CPP and OAS are inflation-indexed, making them inherently superior longevity insurance tools. Deferring CPP and OAS is indeed the best annuity you can ‘buy’.
The timing of the interest
Buying an annuity when interest rates are low means you’re locking in a smaller payout forever. Rates have increased, but payouts still reflect insurers’ assumptions, capital requirements and longevity expectations.
Provider’s risk
Canadian insurers are well regulated, but choosing a reputable company and understanding the warranty options is important.
Lack of flexibility
An annuity should not be purchased with money you may need for emergencies or large discretionary expenses.
What do annuity payouts look like in Canada?
These are examples of payout ranges for 2025 only for life annuities (no refund, no period certain). Rates change daily, but these ranges reflect typical Canadian rates:
One-off annuity, man, 65 years old
For every $100,000 invested:
• Monthly income: $580–650
• Annual income: $7,000–7,800
Single annuity, woman, 65 years old
For every $100,000 invested:
• Monthly income: $540–610
• Annual income: $6,500–7,300
Women live longer and therefore lower payouts.
Joint annuity, 65/65
For every $100,000 invested:
• Monthly income: $470–550
• Annual income: $5,700–6,600
Add a 10-year warranty
Deduct approximately $20-40 per month per $100,000.
To remind: these are nominal payments. With an annual inflation of 2.5 percent, real purchasing power will decline by approximately 40 percent over twenty years.
Where Canadians buy or compare annuities
Retirees can explore annuities through:
Major life insurers
- Sun life
- Canada life
- Manulife
- Desjardins
- RBC Insurance
- iA Financial
- …plus a few smaller carriers.
Insurance Certified Advisors
A licensed advisor can perform comparisons between multiple insurers and help design features (aggregate lifespan, warranties, reimbursement options).
CANNEX
The industry standard database that insurers and advisors use. You do not have direct access to CANNEX, but your advisor can immediately create a comparison report.
When should a retiree actually consider an annuity?
An annuity not replace the need for portfolio management. But there are situations where it can meaningfully improve retirement security.
- You want a stable income floor – Think CPP + OAS + annuity as a base, with your portfolio incorporating discretionary spending and inflation protection.
- You are in good health or come from a long-lived family – Longevity is the whole point. The longer you live, the more the annuity yields.
- You want to reduce the risk of succession of returns – By locking in essential expenses, you reduce the chance of having to sell assets in a bear market.
- You don’t need all your money – Annuities should be purchased with capital from “core expenses,” not emergency or legacy funds.
- You want fewer financial worries – An annuity guarantees a paycheck every month for life. That is psychologically transformative for many retirees.
- You are open to a hybrid strategy – Use the annuity for basic income, keep the rest invested to hedge against growth and inflation, and maintain a cash wedge for short-term needs.
Final thoughts
The annuity puzzle persists because retirees think in terms of control, liquidity and legacies – not longevity. And frankly, Canada makes the puzzle more difficult by not offering fully inflation-indexed annuities.
But for the right retiree – especially one who wants a secure income, less portfolio stress and peace of mind later in life – an annuity can play an important supportive role. Not as an ‘all or nothing’ solution, but as part of a diversified retirement income plan that combines guaranteed income with growth potential.
Even if annuities aren’t perfect, they’re worth more attention than they get. And the people who benefit most from annuities are the ones who are really worried about running out of money. Once that income floor is established, everything else becomes much easier.
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