Consider A Life Annuity
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.
The concept of buying an annuity that guarantees payments for a specified period is called a ‘term certain’ annuity.
If one is looking at a term certain annuity or an annuity with survivor benefits, then it definitely is worth investigating what’s called a back-to-back.
The idea is that rather than buying an annuity with guarantees, you buy an annuity with no guarantees (and thus a higher payout) and use some of the excess income to buy a life insurance policy. The income from the non-gtd annuity minus the cost of the insurance policy can be higher than just buying a straight gtd. annuity. If you die, the insurance policy pays out enough money for your surviving spouse to buy a new annuity on their life at that time.
Second point worth noting, Manulife has been doing research with what is called ‘product allocation’. The concern with equity investments is that they can run out. The concern with annuities is a low payout. The math Manulife has been doing around product allocation provides a framework for determining a split between equities and annuities that maximizes your income while minimizing the risk. (I don’t sell the stuff, I just attended the presentation :). If you’re in that boat, I think it’s something worth investigating.
@InsureCan: Thanks for some great information. I know people have been hesitant to purchase annuities because of the current low interest rates and that they will be locked in for life. I think the insurance companies are recognizing this and making changes in their products to make them more attractive. It’s definitely worth looking into and shopping around to perhaps find a solution that works.
I’m still a fan of TFSA’s versus RRSPs for my particular situation. I really like the long-term flexibility of the TFSA accounts, especially if I want to do contract or part-time work as I get older to supplement my CPP, teacher pension and investment incomes.
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That is certainly something to consider. I myself would rather have an FC handle my money and have access to it. with all the different options out there I see no reason to get locked into something.
@SE Book: The best thing about so many options is that you should be able to find the right products for you and everyones circumstances are different.
@InsureCan – the math isn’t Manulife’s – instead, they license a product allocation algorithm from The QWeMA Group [www.qwema.ca]. The math underpinnings of this approach are set out in this paper: http://www.ifid.ca/pdf_workingpapers/WP2006OCT3.pdf – in a relatively easy-to-read format.
I saw Moshe Milevsky speak at a Manulife presentation and was lead to believe that Manulife had sponsored the research on it. Actually, I checked the link, and that’s what’s indicated. So, I call semantics :). Manulife didn’t do the research, they paid to have it done.
In any event, that Moshe Milevsky guy is someone that needs more paying attention to. His work on product allocation is ground breaking in the industry and very relevant today. And I’ve seen him in some other videos where he displays a knack of being able to take complex and confusing insurance issues and translate them into easily digestable nuggets of advice.
Link please and thank you.
I can see the advantages of having a Life Annuity; they do provide a guaranteed income for life. The disadvantage is that that it is irrevocable and you can be locked in for life, also a lack of control of your assets. Inflation can also be a significant factor later on.
Can anyone give me a link/address of where I can obtain some comparison quotes for annuities – without obligation?
Thanks for your help.
@Christine: Here’s an address that will give you some comparisons for annuities.
http://www.instant-life-insurance.net/Canada/annuity.html