The Annuity Puzzle: Why Canadians Avoid One of Retirement’s Most Misunderstood Tools

Annuities have a strange reputation in Canada. Ask economists, actuaries, or retirement researchers and they’ll tell you that converting a portion of your savings into guaranteed lifetime income is one of the smartest and most efficient ways to reduce retirement risk.

Finance professor Moshe Milevsky has been writing about this for two decades. And Fred Vettese – one of Canada’s most widely read retirement experts – has repeatedly said that for many retirees, the math behind an annuity is “pretty compelling,” especially for those without a defined benefit pension.

Yet almost nobody buys one.

The percentage of Canadians who voluntarily purchase a life annuity is astonishingly low. Vettese estimates that “only about five per cent of people who are in a position to buy an annuity actually do.”

And Bonnie-Jeanne MacDonald, in her research on pooled-risk retirement income, notes that retirees are “strongly opposed to voluntary annuities, as they want to keep control over their savings.” That line neatly captures one of the biggest behavioural hurdles: loss of liquidity and fear of giving up assets.

So if annuities solve real retirement problems, why do we avoid them? And in a country like Canada, where you can’t even buy a true inflation-indexed annuity, does the product still deserve a place in retirement planning?

Let’s break it down.

What a Life Annuity Actually Does

A life annuity is the cleanest version of longevity insurance. You hand over a lump sum to an insurer, and they guarantee you monthly income for life. If you live to 100, the insurer pays you. If stock markets collapse, you still get paid. If you’re 87 and never want to look at a portfolio again, the income keeps flowing.

Annuities neutralize two risks that haunt retirees:

1. Longevity risk: outliving your money.
2. Sequence-of-returns risk: the danger of poor early-retirement markets undermining a portfolio permanently.

Economists love 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

1. Loss of liquidity and control

This is the big one. Once the money goes in, it’s gone. You can’t pull it back, change your mind, or draw a lump sum for a home renovation or medical need. Retirees worry about giving up optionality (understandably so).

2. Bequest motives

A large share of retirees want to leave something behind for kids or charity. A plain-vanilla annuity typically leaves nothing. Even adding refund features reduces payouts.

3. Fear of dying early

Behaviourally, humans overvalue the chance of dying early and undervalue the risk of living to 92 and needing income. MacDonald’s research shows this emotional bias is pervasive: retirees “want to keep control,” even when that control makes their income more fragile.

4. Complexity and low product awareness

Annuities are simple in theory but intimidating in practice. Most Canadians don’t understand how they work or why pricing fluctuates.

5. The interest-rate effect

Years of low rates made annuity payouts look tiny. Even now, despite better yields, retirees remember the low-rate era and assume annuities are a bad deal.

6. Advisor bias

Some advisors rarely bring them up. Some don’t hold insurance licenses. Others prefer portfolio-based solutions. If advisors don’t raise the topic, retirees don’t either.

7. The Canadian flaw: no inflation-indexed annuities

PWL Capital's Ben Felix has hammered this point home before. In Canada, you cannot buy a true inflation-linked annuity that rises with CPI.

That’s a serious limitation. A fixed-dollar payment feels safe at 65 but can lose half its purchasing power by 85 in a world with even modest inflation.

This issue alone explains a huge part of the annuity puzzle in Canada. A retiree wants guaranteed income – but guaranteed income that shrinks every year doesn’t feel like much of a win.

ALDAs

A quick note on ALDAs, or Advanced Life Deferred Annuities. Ottawa introduced ALDAs in 2020 as a way for retirees to insure only the late-life portion of retirement, with income beginning as late as age 85 and up to 25 percent of registered assets (to a lifetime dollar cap) permitted to fund the purchase.

In theory, ALDAs are a clever form of longevity insurance. In practice, the market is extremely limited: as of 2025, Desjardins is the only major insurer offering an ALDA product. They remain a niche option, useful for people who already have early- and mid-retirement income well covered and simply want a backstop for advanced 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. Indeed, delaying CPP and OAS is the best annuity you can “purchase”.

Interest-rate timing

Buying an annuity when rates are low means locking in a smaller payout forever. Rates have risen, but payouts still reflect insurer assumptions, capital requirements, and longevity expectations.

Provider risk

Canada’s insurers are well regulated, but choosing a reputable company and understanding guarantee options matters.

Lack of flexibility

An annuity shouldn’t be purchased with money you might need for emergencies or large discretionary spending.

What Do Annuity Payouts Look Like in Canada?

These are sample 2025 payout ranges for life-only annuities (no refund, no period certain). Rates change daily but these ranges reflect typical Canadian quotes:

Single-life annuity, male, age 65

For every $100,000 invested:
• Monthly income: $580–650
• Annual income: $7,000–7,800

Single-life annuity, female, age 65

For every $100,000 invested:
• Monthly income: $540–610
• Annual income: $6,500–7,300
Women live longer, hence lower payouts.

Joint-life annuity, 65/65

For every $100,000 invested:
• Monthly income: $470–550
• Annual income: $5,700–6,600

Add a 10-year guarantee

Subtract about $20–40 per month per $100,000.

Remember: these are nominal payments. At 2.5 percent annual inflation, real purchasing power drops by about 40 percent over 20 years.

Where Canadians Buy or Compare Annuities

Retirees can explore annuities through:

Large life insurers

• Sun Life
• Canada Life
• Manulife
• Desjardins
• RBC Insurance
• iA Financial
• …plus a few smaller carriers.

Insurance-licensed advisors

A licensed advisor can run multi-insurer comparisons and help design features (joint life, guarantees, refund options).

CANNEX

The industry-standard database insurers and advisors use. You can’t access CANNEX directly, but your advisor can produce a comparison report instantly.

When Should a Retiree Actually Consider an Annuity?

A life annuity doesn’t 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 the bedrock, with your portfolio handling discretionary spending and inflation protection.
• You’re in good health or come from a long-lived family – Longevity is the entire point. The longer you live, the more the annuity pays off.
• You want to reduce sequence-of-returns risk – Locking in essential spending reduces the chance you’ll need to sell assets in a bear market.
• You don’t need all your money liquid – Annuities should be purchased with “core spending” capital, not emergency funds or legacy funds.
• You want less financial anxiety – An annuity guarantees a paycheque every month for life. That’s psychologically transformative for many retirees.
• You’re open to a hybrid strategy – Use the annuity for base income, keep the rest invested for growth and inflation hedging, and maintain a cash wedge for short-term needs.

Final Thoughts

The annuity puzzle persists because retirees think in terms of control, liquidity, and bequests – not longevity math. And in fairness, Canada makes the puzzle harder by not offering fully inflation-indexed annuities.

But for the right retiree – especially one who wants secure income, reduced portfolio stress, and peace of mind late in life – an annuity can play an important supporting role. Not as an “all or nothing” solution, but as part of a diversified retirement income plan that blends guaranteed income with growth assets.

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 genuinely worry about running out of money. Once that income floor is set, everything else becomes much easier.