If you want to turn your RRSP savings into something that more closely resembles a true pension, then you might want to consider purchasing a life annuity.
This product is available from life insurance companies and provides a series of periodic payments (usually monthly) that you are guaranteed to receive for the rest of your life. The amount of your payments will be determined by the value of your RRSP, your age and sex, current interest rates, and whether you want all or a portion of the payments to continue for as long as your spouse lives.
Income For Life – Or A Guaranteed Period
With an annuity you need to be aware that you no longer own the investment. You have exchanged it for lifetime income. On the plus side, you no longer have to watch the stock markets or interest rates, and you don’t have to worry about running out of money if you live to a ripe old age.
Although a life annuity offers you the security of knowing that for as long as you live you will receive a fixed income, many people are uncomfortable with the thought that all of their RRSP savings would be gone if they only lived for a short period of time after retirement.
One option is to buy an annuity that will guarantee payments for a specific period of time, such as 10 or 15 years, so that if you die within the guarantee period, the payments continue to your beneficiary.
What About Emergency Cash?
Another thing that concerns people is not having access to a lump sum in case of an emergency. Because you no longer own the investments you can’t withdraw money from your account for unexpected costs.
This lack of control and flexibility is a key reason why a life annuity lacks broad appeal. As a result, over the last few years, some annuities have been introduced that not only have a set guarantee period but also provide individuals with access to a lump sum cash advance of the future guaranteed payments. This provides some of the flexibility people are asking for.
Is A Life Annuity Right For You?
Because you lock in the annuity payment for the rest of your life, converting your RRSP into an annuity is best done only after you have given consideration to all of your other options.
If you are undecided about whether or not to buy an annuity, because you feel that interest rates will eventually move higher, or you are not quite ready to give up control over your investments, you could consider rolling the RRSP into a RRIF at retirement and then later on, if rates go up, or if you simply become tired of managing your own money, you can transfer the funds from your RRIF into an annuity. You can do this all at once or gradually over several years.
One benefit of waiting to buy a life annuity is that the older you are, the higher your lifetime annuity payments will be. Another option is to roll a portion of your RRSP into a RRIF and use the remaining amount to buy a life annuity. This way you can get the best of both worlds.