Milevsky and Alexandra Macqueen coined a great term to apply to annuities when they titled their book on the subject: Retire your nest eggthat I discussed in the Financial Post in 2010 under the title “A remedy for pension envy?”
Engen notes that an annuity is “the cleanest version of longevity insurance… You hand over a lump sum to an insurer, and they guarantee you a monthly income for life. When you live to be 100, the insurer pays 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 keeps flowing.”
In other words, annuities neutralize the two major risks that plague retirees: longevity risk (the chance of outliving your money) and the risk of succession of returns, the danger of a stock market collapse, retiring prematurely and doing irreparable damage to a portfolio.
Despite all the apparent upside to annuities, Engen notes that “almost no one buys one.” He cites an estimate from Vettese that only about 5% of those who could buy an annuity actually do so. Engen suggests there is a behavioral hurdle: the fear of losing liquidity and control of the underlying assets. He cites research by Bonnie-Jeanne MacDonald of the National Institute of Aging on pooled risk retirement income, in which she wrote that such retirees “are strongly opposed to voluntary annuities because they want to maintain control over their savings.”
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Still, the new Retirement Club founded earlier this year by former Tangerine advisor Dale Roberts (see the blog posted on my own site in June) recently had a guest speaker extolling the virtues of annuities: Phil Barker of the online annuity company Life Annuities.com Inc.
Barker said many clients tell him they have done very well in the markets over the past two decades and are now eager to capture some of those gains. They may be looking for fixed income strategies, and many were excited about GIC returns when they were slightly higher than they are now (some are in the 6-7% range). But they are less happy with the new rates for GICs that are now reaching maturity. Meanwhile, annuities have just hit a 20-year high in November 2023, so the time to consider one has never been better, Barker told the Club in August.
Annuities allow you to lock in an interest rate for the rest of your life, so if your timing is right, it may make sense to allocate some money to it.
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Related reading: GICs vs. annuities
Barker said eight life insurance companies offer annuities in Canada: Desjardins, RBC Life Insurance, BMO Life Insurance, Canada Life, Manulife, Sun Life, Equitable Life and Empire Life. They are all covered by Assuris, a third-party organization that guarantees 100% of an annuity up to $5,000 per month. So if one of those companies were to go bankrupt, the annuity would be honored through Assuris by one of the other companies.
Barker described an annuity simply as a “personally funded pension.” To set one up, you can take registered or unregistered funds and send the capital to an insurance company. In return, they give you an income stream for as long as you live: this is the traditional annuity. Unlike annuities in the US, you can’t add money to an existing annuity, Barker told the club, nor can you commingle money from things like RRSPs and non-registered funds.
However, you can buy a new annuity every time you need it. There is no medical underwriting for annuities, unlike life insurance. Joint annuities for couples are a great value, he said, but the tax stubs are sent to the primary annuitant. Also, income splitting is not possible under current CRA rules.
When annuities shine
Annuities shine when you feel confident about your health and longevity prospects. Having an assured income of $X,000 a month to live on means your other sources of income that fluctuate with the stock markets can be weathered, Barker said. “We see people getting 6.5 to 8.5% per year for the rest of their lives, depending on their age.”
As Dale Roberts noted during Barker’s speech, if you have enough to live on from the pension pot alone (annuities, pensions, CPP/OAS etc.), you can take some risk in other areas such as stocks and stock ETFs.
Financing through registered versus non-registered accounts
Registered funds are transferred tax-free to an annuity; that’s because money is not deregistered, but rather moves from one registered environment to another registered environment. When it suits, it will be fully loaded. The monthly income from the annuity is then fully taxable in the year in which it is received.
If you finance with unregistered money, the taxation is significantly different. First, if your non-registered account has unrealized capital gains, you must realize them and pay taxes on them. Furthermore, so-called prescribed annuities are relatively tax-efficient. The capital used to fund the annuity is not taxed, only the profits, Barker says. “The taxable portion of the annuity income is therefore a very small amount. Prescribed means that the taxation is the same or the same throughout the entire term of the annuity.”
The Club also covers other retirement products that can resemble annuities in some ways: the Vanguard Retirement Income Fund (VRIF) and the Purpose Longevity Fund, both of which I have small pieces in. Dale adds that the Longevity Fund has the potential to be a “nice addition to annuities” because it is “intended to increase benefits quite a bit in the later years thanks to the mortality credits.” Those who live very long lives are subsidized by those who die much earlier.”
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