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Retirees: 3 Reasons to Buy an Annuity

Planning for retirement is a herculean task. You are no longer working but need a steady stream of income to not just survive but also lead a comfortable life. There are several ways to generate a passive income stream in retirement. 

While you can invest in real estate and collect rent, retirees can also buy quality dividend-paying stocks to ensure steady cash flows. 

Alternatively, you can also look to buy an annuity. An annuity is basically a contract with a life insurance company where you deposit a lump sum of money and they agree to pay you a guaranteed income for the rest of your life. 

Annuities are generally used to generate retirement income and you can purchase it with savings in your RRSP, RRIF, or even a non-registered account. The life insurance company will return capital to you including interest via a stream of regular payments.

These payments can be set for a number of years or for the rest of your lifetime. Further, retirees can choose to receive the payments on a monthly, quarterly, semi-annual, or annual basis. 

Types of annuity

The annuity income that you get is directly related to several factors but the most important are the prevailing interest rates and the number of years you are expected to live. 

Once you buy an annuity you are not allowed to make changes to it which means your regular payments are locked in. 

Now, if you are over the age of 65 and do not have a company pension plan, you may be eligible to claim the pension income tax credit. This basically means you won’t be taxed on the first $2,000 of annuity income you generate each year. 

There are two types of annuities. The first is a term-certain annuity which provides you a guaranteed regular income for a particular number of years. These annuities are bought with investments from an RRSP or RRIF and extend to the age of 90. In case you die before the end of the term, the payments will go to your estate. 

The other type is a life annuity where you get a guaranteed regular income for life. Here, payments stop when you die and no money will go to your estate. However, you can choose a nominee to continue receiving payments after your death. 

In order to protect your annuity program, the Canadian government insures your annuity to certain limits, in case your annuity provider is out of business. In such a case, the first $2,000 you receive per month is insured at 100%. The amounts over this threshold amount are insured at 85%, in case the insurance company is a member of Assuris. 

Benefits of annuity payments

There are several benefits of starting an annuity. The life insurance company agrees to pay the retiree a guaranteed income for the rest of their life which means they will never run out of income. This also means the retiree will not have to make any other investment decision once they have deposited the capital. 

The payments are fixed and you know exactly the amount you will receive which will help you plan better. When you purchase an annuity plan, you can add several options. For example, if you are married you can add an option that guarantees regular payments that will continue for as long as either you or your spouse lives. 

The annuity can serve other financial goals that include paying a charity or providing money for your beneficiaries. An annuity that is insured will generate a steady stream of income in your lifetime and provide your beneficiaries with a lump-sum amount at the time of your death. 

The ideal time to buy an annuity is when interest rates are higher as you can benefit from a higher income stream in retirement. 

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