ASK THE MONEY LADY: Annuities for life-long income

Dear Money Lady: My advisor suggested investing in annuities and the way he made it sound I was really thinking of doing it. Could you tell me what you think? vicky

Vickie, annuities are a great way to save for the future and usually chosen by someone who does not want to be concerned with the ups and downs of the stock market, but instead prefers a “set-it and leave-it” strategy with a guaranteed monthly income for life.

All annuities are insurance products and vary widely based on the provider. Clients can choose an index tailored to specific profiles, such as conservative, moderate, growth or aggressive. Depending on the insurance provider, you may even be able to choose a combination of indexes with variable payments. Annuities provide excellent diversification to the average retirement portfolio.

There are four main types of annuities: straight life, joint life, term-certain and deferred. We will discuss each one plus some of the added features you can opt for.

Straight life annuities are the simplest. This annuity guarantees a periodic income for life with payments starting immediately minus a premium. Be careful with this one. This annuity does pay the highest amount for life, but when you die the payments stop and there is no payout to the estate. The benefit from this plan is if you live longer than your life expectancy, you will benefit from the funds left in the pool by those who died earlier. One thing I am not a fan of with this product is that the payments are fixed over time and do not compensate for inflation. Because of this you can add an income protection option called an increasing life annuity. The plan will then increase by a defined pre-set percentage each year. You can also choose an indexed annuity (often less expensive) that will increase the payments each year in line with inflation (measured only by the Canadian Consumer Price Index).

Joint life annuities last as long as either partner is alive. There are a couple of options with this one. You can buy an income-reducing annuity which is less costly, whereby the payment from the joint annuity declines when the first spouse dies. There is also an option in this plan to guarantee the payout of the premium if you choose a cash payment provision. When the annuitants die, the difference between the premium and the payout can then be paid to the beneficiaries.

Term-certain annuities are usually the one I prefer. In this annuity, payments are made for a specific period whether or not the annuitant dies. If you are using funds from your RRSP/RRIF in a term-certain annuity, payments usually only last until age 90. You can manipulate your term from three to 40 years and most are highly flexible. A cashable option is only available with this type of annuity since the convertible value can be easily calculated at any time. If needed, you could cash in your plan in the event of a serious medical condition or financial emergency.

The last type of annuity is called a deferred annuity and often purchased long before the income from the product is required in retirement. With this plan clients can take advantage of a slightly higher rate of interest by purchasing the annuity years earlier than actually required. You will be encouraged to pay a higher premium during the deferral period, allowing interest to accumulate in the product and therefore increasing the overall value at the agreed upon conversion date when it switches to a paying annuity. With this product, it is best to opt for a return of premium guarantee in the event that you die prematurely before the payments start. One thing to remember with this one: interest earned during the accumulation phase is taxable, so it is best to fund this product with your registered investments.

Written by Christine Ibbotson, author, finance writer, national radio host, and now on CTV Morning Live and CTV News @6. Send your money questions, answered free, through her website at askthemoneylady.ca