Annuities and you. What you need to know
You may be worried about stock market volatility and wondering how to get a more stable return on your investment portfolio. You may be starting - or well into - your retirement and wondering about maintaining a secure income stream, passing on a steady income to your spouse, or gradually transferring an inheritance to your grandchildren. And any or all of that may have you wondering about annuities.
That’s probably because you already know that an annuity will provide a guaranteed income, although return rates may appear to be lower than traditional term deposits. And you’ve likely heard that annuities can be a useful addition to an investment portfolio or a vital ingredient in retirement income planning. But there’s more you need to know.
Annunities - are a financial product, usually obtained from a life insurance company, that pays you a regular income for a fixed period or the rest of your life. They can be ideal for transforming a lump sum into a dependable income stream. Once an annuity is set up, there are no further investment decisions to make.
Li annuities provide a guaranteed income for life, no matter how long you live, ensuring you will never outlive your money. Life annuity options include:
Single life – which provides a pre-determined income for the life of the annuity owner. The contract normally ceases when the annuitant dies but see “guaranteed periods” below.
Joint and Survivor Life – which covers the lives of two individuals (usually spouses). The ‘primary’ annuitant receives the income until death and the income continues to the ‘secondary’ annuitant until that person’s death.
Indexed – which offers for annuities acquired with registered funds a fixed annual increase in payments to offset inflation.
Guaranteed Periods – where payments can be guaranteed for a specific term. Upon your death, this will provide guaranteed payments to your beneficiary which will continue until the term expires regardless of stock market or interest rate changes
Term certain annuities - provide you with a guaranteed, regular income for a specific period. Once the period is over, the annuity contract and payments end. If you die before the contract ends, payments will continue to your designated beneficiary until the specified period expires.
Most annuities purchased with non-registered funds are issued with a “prescribed tax status”. This provides a tax deferral by averaging out and deferring taxable interest earned over the expected life of the annuity. These offer an effective way to receive income from your portfolio in a tax efficient manner and may be more attractive than earning the income as interest through a regular term deposit.
Once you commit to the terms of an annuity you can’t change the plan but there are plenty of ways to structure an annuity to gain the most benefit. So, while annuities can be a good investment strategy for you, the best strategy is always to talk to your professional advisor first.
This column, written and published by Investors Group Financial Services Inc. (in Quebec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any nvestments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
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