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:
- Longevity risk: outliving your money.
- 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
- 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
This is a great, top-level analysis – thank you! It was especially good to see the dollar amounts for typical quotes to give better understanding of actual income. (Yet another case where your money doesn’t go as far when female…) For me, it will come down to my investment account size, and whether there is enough to carve off for a secure base when the time comes.
Thanks Jennifer!
Jason made an excellent response below as to why women receive lower initial payouts – it has everything to do with women in general outliving men so the number of monthly payouts would be larger for women than for men.
A comment and a question. It seems that whether an annuity is a good idea or not might depend on the prevailing interest rate at the time of your retirement. Also what is the ten year guarantee about? Thanks
Here’s a thought exercise comparing annuities and pensions a bit. If you buy a $100,000 annuity, then on Day 1 that annuity should have a “commuted value” of around $100,000, because the current interest rate would already be baked into the price. (A bit less due to overhead and profit for the insurance company, but let’s ignore that for now).
Now, if interest rates drop on day two, then just like with pensions, the “commuted value” of your annuity should increase. Now your annuity might be worth say $110,000. Vice versa if interest rates rise, the “commuted value” of your annuity might be worth $90,000.
Obviously customers don’t really have an option to cash out their annuities, but if they could, the math might look something like the above.
Hi Douglas, yes the prevailing interest rate is a big factor. The guarantees are about alleviating the fear of dropping dead within a short time after sending a big cheque to an insurance company. Of course, any guarantees would reduce the annuity payout.
I was considering an annuity when I retired but the lack of CPI indexing as well as the reduced income for women, took me off the idea.
The income for women is not “reduced” in a negative sense.
Annuities are priced based on actuarial mortality data and it is a fact that, as a group, women live longer than men. The mathematical expectation is that, over the lifetime of an annuity, the payouts to women will equal those of men. Less $ per year = equivalent $ over lifetime.
Loving the depth of this article, Robb! Fantastic resource!
Now – would you buy an annuity for yourself?
Hi Mark, I think it would depend on interest rates at the time, as well as the size of our remaining RRIF/LIF balances.
First, I’d plan on delaying CPP and OAS for both of us, locking in more guaranteed inflation-protected income (best annuity you can buy).
I also know that, behaviourally, it is difficult for retirees to withdraw and spend from their own savings after decades of growing the pile. Being aware of that, and succumbing to it, are two different things so I’d have to see how our go-go years fare when it comes to drawing down our investments. We have no other pension income.
There’s also the idea of making things easier for my wife should she outlive me. Locking in more guaranteed lifetime income for her would make me feel better, I’m sure.
The lack of indexing is a problem, but I think it could be offset by purchasing the annuity much later in life (75+) when we’re theoretically in the slow-go / no-go phase and spending is no longer keeping pace with inflation anyway.
So, to answer your question, I’d look seriously at annuities from 70-75, maybe even laddering them to minimize regret of rising or declining interest rates.
Two use cases come to mind:
One could also sell their house at 75 or 80 and if they aren’t comfortable with investing, buy an annuity with the proceeds.
The other is Divorce + Vice. I know someone who in their 60s walked away with half of their ex-spouses pension, put into a LIRA but otherwise 50% unlocked. Gambling addiction assured that the money wouldn’t last long. Unfortunately people like that probably aren’t getting proper advice (and even if they are, good luck convincing them to give up control!)
One situation that might make an annuity appealing might be as an investment and disbursement vehicle held in trust (i.e. informal trust) for a disabled or dependent family member and could provide a metered income to an adult beneficiary who might not be able to responsibly manage their own spending. The annuity takes a lot of stress away from a trustee – typically a family member with no formal financial background. Unfortunately, the taxation rules surrounding even just the classification of such trusts are so murky (and the tax code so overly complex in general, here in Canada) and since family trusts are a tempting target for cash-strapped governments (and taxed in the hands of the trustee, B.T.W.), that whether or not an annuity could be used for such a purpose becomes a moot point. It is rather a shame because annuities, in-trust, could provide some solid measure of security for adult beneficiaries who might otherwise struggle from month-to-month, while also alleviating stress on family trustees watching out for them. The government could make better use of this tool as a supplement for disability benefits, and OAS/CPP for older beneficiaries. But lack of indexing might still be a deal-breaker, especially where younger beneficiaries are involved, and that’s an industry problem.
Hi Peter, I was just discussing this with a client and came to similar conclusions – the payout would be very small for someone very young, and with no inflation-protection I would worry about the declining purchasing power over many years (decades).
And I suppose the next deep dive – can annuities be held in RRSP/RRIF or TFSA accounts? Or just in non-registered? What about in a LIF? And if so, how would each of those work?
Breaking it down, on average, based on life expectancy, how much would a $100,000 annuity be expected to return to the purchaser vs cover overhead and profit for the insurance company? Compared to if the purchaser just bought index funds and “paid themselves”?
You quote Fred Vettese, who acts as an advisor for Purpose Investment’s ‘Longevity Pension Fund’. I would love to see an analysis of this product, which I believe is similar to annuities, but eliminates some of their downside. Thanks for this great analysis!
I have heard of the Longevity Pension Fund as well and second the suggestion for a review.
Hi Stephen, another great idea in theory but the uptake, as far as I know, is very poor. Only $14.5 million in assets as of Dec 31, 2024. I’m not sure it will survive long-term at that rate.
I’ve been intrigued by the Longevity Fund but haven’t invested myself.
As I understand, the fund is structured as a mutual fund and has the usual high fees to go with it. Those might be worth it on the decumulating side of things to have the payout managed, but during the investing stage? It’s hard to swallow. I also find it had to swallow the 0.5% reduction in fees they give to people who buy through an advisor. I know the theory is that the advisor will provide the advice and planning and get paid directly for that, but I would ask what planning and advice the Longevity Fund offers for the extra 0.5% they charge people buying direct? Not much is my guess.
Also as a mutual fund, it’s probably not included in any employers DC plans, or pushed by any of the big fund providers as they would be a third party offering.
All in all, I’m not surprised at the lack of uptake.
Great article on a misunderstood product. Thank you! I am also interested to know the tax implications of the income stream. Is it considered revenue and taxed or, assuming purchased outside of a registered account using post-tax money, is the cash flow tax free?
Hi Meganc, thanks! Taxation depends on whether its from a registered plan (RRIF or LIF) or a non-registered plan. Income from a registered plan is fully taxable as income in the year received, and eligible for pension income splitting.
Taxation of a non-registered annuity depends on whether it’s a “prescribed” or “non-prescribed” annuity, with only the interest portion of each payment being taxable. The remaining portion is a tax-free return of your original investment (principal).
A non-prescribed annuity has more taxable income in the early years, while a prescribed annuity distributes the taxable income evenly over all payments.
My company pension was turned into an annuity – what is the benefit/downside of this conversion?
Hi Cleone, I think you may be referring to a copycat annuity. This is an excellent option to consider if you have a company pension plan and you are worried about the long-term health of the company (to avoid a Sears or Nortel situation).
Here’s an excellent article about copycat annuities: https://www.theglobeandmail.com/globe-investor/retirement/retire-planning/worried-about-your-pension-why-a-copycat-annuity-might-be-right-for-you/article37580222/
Thank you for the quick response.
I’ve read all three editions of Frederick Vettese’s book, Retirement Income for Life. I looked into annuities on my own and with my financial advisor, for both me and my partner. Each time I looked, with different scenarios, it just didn’t make sense to me or my advisor. Instead I finally became convinced to delay CPP and OAS – something I was very reluctant to do, at first.
Even Vetesse is lukewarm on annuities, acknowledging that low interest rates are not an attractive factor these days.
As you mentioned, instead of buying an annuity, we “annuitized” our CPP and OAS by waiting until age 70 to take both. It is inflation-protected (and is at a much better rate than buying an annuity would be, too).
I hope by the time I’m retiring (20 – 25 years) they have an annuity that is indexed to inflation.
Would be a good add-on as a base income along with CPP and OAS and give us a consistent “floor” of income.
Until then though, good idea to just delay CPP and OAS till 70.
Really neat topic!
Without indexing it’s a hard no for me.
Hi Robb, thanks for the great article and discussion on this topic. My biggest concern with buying life annuities is the standard 3-4% embedded commission. Is there a way to dial this down to get the highest possible net yield?
Also, if I ladder over 5 years to minimize interest rate risk and split carriers to stay within Assuris limits, won’t I end up with too many contracts and too much administrative annoyance?