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An annuity in Canada is a way to turn your savings into a stream of retirement income offered by insurance companies. For those people thinking about planning for their retirement, an annuity is a potential source of retirement income which can come with many benefits. Today we’ll explore the various aspects of annuities to answer in detail “what is an annuity in Canada”.

What are the types of annuities?

There are many types of annuities in Canada, we will talk about the 3 most common types.

Life annuities

Life annuities are annuities which you know exactly how much money you will receive each year. With a fixed annuity, when you put in your savings, the insurance company will calculate for you how much you would receive in income each year. Most importantly, life annuities last until you pass away, which is a great guarantee for the annuity holder! However, if you pass away before all the money in the annuity is paid out, then your beneficiary or estate would not have access to that money.

Variable annuities

Variable annuities are annuities which depend on the market performance, because after you deposit your money with the insurance company, the money is actually being invested for you. If the investment performance does well, you’ll receive more money. If the investment doesn’t perform as well, then unfortunately you’ll receive less money that year.

Term annuities

Term annuities are similar to life annuities, except there is a pre-determined amount of time which the annuity will pay out. Additionally, with term certain annuities, if you pass away before the end of your life, the money will be able to be transferred to your beneficiaries!

How does an annuity work?

An annuity works by you first consulting with an advisor, preferably one who specialized in retirement planning or annuity products. Afterwards, you will choose the amount of money you would like to contribute into the annuity, and what type of annuity you want, in addition to when you want the income to start.

Is an annuity a good idea?

An annuity is a good idea if it fits into your financial goals. Usually, an annuity should be considered by someone who fits a few criteria:

·      Has lump sum savings

·      Wants a steady income for a pre-determined time frame

·      Nearing retirement

If you fit into at least 2 of the above criteria, then an annuity in Canada is an option for you to think about.

It’s important to be careful though when you consider the kind of annuity you want to purchase, however, because an annuity is a contract that you enter into with an insurance company. It is often a very long commitment with little ability to change anything after the contract is settled.

Is annuity income taxable in Canada?

Annuity income can be taxable in Canada. It really depends on the type of account you want to hold the annuity in. For example, if you keep your annuity within a TFSA account, then you’ll be able to receive all the income annually tax free. However, if you keep your annuity within an RRSP, then just like taking withdraws from an RRSP regularly, the income from an RRSP annuity would also be taxed.

One extra consideration is if you have a variable annuity in a non-registered account, where the annual income is affected by the market performance, then you would be subject to capital gains and losses annually as you make withdraws.

What is the difference between an annuity and an RRSP?

The difference between an annuity and RRSP is quite significant. First of all, the RRSP is a type of registered account. An annuity is a TYPE of investment contract which you can hold within an RRSP account. Likewise, you can also hold an annuity within a TFSA or non-registered account as well. The type of account will determine what sort of tax benefits you may be entitled to, but it has nothing to do with the actual performance of the investment itself.

When you speak to your advisor, have a discussion on which account you want to use to hold your annuity. It’s important to make sure you actually have the contribution room in your account as well, since there is a finite contribution room in your TFSA and RRSP accounts. It may just turn out that you must keep the annuity in a typical, non-registered account!

If you’ve been researching different types of safe, steady, and nearly guaranteed investments in order to generate an income, then you may have come across Canada Savings Bonds. A Canada Savings Bond, or CSB, is one of those things that you often hear about online, through banks, and even investment advisors, but few people actually use it, or even know what it is. So, exactly what is a Canada Savings Bond?

The first thing you need to know is that they are considered a type of fixed income investment. What this means is that the goal of this investment vehicle is to help provide a steady return, rather than aggressive and explosive growth. You can learn more about the different types of fixed income investments.

Do Canada Savings Bonds still exist?

Funny you should ask! The short answer is “yes”, Canada Savings Bonds do still exist, although it’s in a form of purgatory. This is because even though they still exist, newly issued CSBs are no longer available for anyone to invest into any longer!

As of 2017, the declining popularity of Canada Savings Bonds for nearly 30 years resulted in the federal government making a big, yet necessary decision to stop offering anymore savings bonds. The fact of the matter is, the government could only offer a 0.5% rate on a CSB. As of 2021, all the CSBs have “matured” and they now need to be traded back in for cash at your bank.

How do Canadian savings bonds work?

Time for a little history lesson on Canadian Savings bonds work. Bonds were started back during war time, when the government needed to raise a lot of funds for the war efforts. By offering these bonds, they could entice citizens to help fund the war efforts, with the promise of an annual interest. The bonds would mature at different times; the government offered 10 year, 20 year, or even 30year bonds. At the end of the term, you would be able to trade in your physical bond certificate for cash, while enjoying the interest that you’ve been earning.

How you receive the interest from the bonds The first kind of bond is a regular interest bond. What this means is that you would receive the interest at the end of every year. A second type of bond is a compound interest bond, which means you would receive all of the interest at the very end of the term. Yes, for the 30 year bonds, you would be waiting a long while, although typically a compound 30 year bond isn’t offered.

Are Canada Savings Bonds a Good investment?

It’s kind of a moot question at this point, because Canada Savings Bonds are no longer offered by the federal government. More importantly, as of 2021 all issued bonds have matured, meaning that none of them are granting interest any longer. Therefore, there is literally no money to be made on an investment into a CSB, so a Canada Savings Bond is not a good investment for anyone.

How much is a $100 saving bond worth?

As mentioned above, all Savings Bonds have matured, and therefore, in Canada, Savings Bonds no longer offer any returns. If you have a bond certificate that is worth $100, then depending on whether it’s the regular interest type or the compound interest type, it can be worth different amounts, since for the compound interest type all of the accumulated interest would be given to you when you trade in the bond certificate.

Alternatives to Canadian Savings Bonds

As an alternative to Canadian Savings Bonds, there are several options that are available to you. Recall that the main purpose of a savings bond is that it promises a steady income, and is very good at preserving your capital. With these 2 main benefits in mind, here are some alternatives to the Canadian Savings Bond which can achieve the same results:

Guaranteed investment certificates

Guaranteed investment certificates, or GICs, are offered by banks, credit unions, and trusts. They promise a guaranteed interest rate, much like bonds, and they are legally obligated to preserve your capital. The downside is, like bonds, your money is also locked it. You can learn more about GICs in this article here.

High Interest Savings Account (HISA)

These accounts are typically found at most financial institutions, although you should take a look at some online only banks in Canada which typically offer better HISA rates than a retail bank. Typically a bank would offer 0.3% to 0.5% interest rate, but some online banks will offer an interest rate of 2% of even more! Additionally, you won’t need to lock in your money like a GIC, so it offers liquidity which is extremely useful as well.

Corporate Bonds

Not only can the government offer bonds, corporations can offer bonds as well! It works in much the same way as a regular bond, except you would trade in your bond certificate at the end of the term to the issuing corporation in question. Typically only large, well-established corporations offer bonds, and you are essentially loaning money to that company.

Bonds from other countries

This is a little different, but if you want to, it is possible to buy bonds from other countries. Most typically this is done through investment into funds which hold bonds from different regions of our world.

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A mutual fund in Canada is a particular type of managed investment vehicle which is overseen by a fund manager. It is closely related to another common type of investment, stocks. A mutual fund is a bundle of stocks, and when you buy into a mutual fund, you own a piece of the basket, rather than directly owning the stocks themselves. Today, we’ll take a deeper look into mutual funds and how they might fit into your investment portfolio.

What is a mutual fund?

A mutual fund is great investment vehicle which by its nature, has a built-in diversification function. Most financial advisors and investment managers will tell you that having a robust, diversified investment portfolio will be the key for a great financial future.

A mutual fund in Canada is closely linked to stocks, in that mutual funds are a basket, or bundle, of many different stocks. Why is this important? Well, we know that it’s important to have a diversified financial portfolio which can withstand volatility in the stock market. Naturally, because of this idea, many people will want to invest in not one, but many different companies. However, this can be very tough to do, because trying to diversify to many stocks, up to hundreds of different companies, can be very costly.

By investing into a mutual fund, which is comprised of many people gathering their money together, individual investors are able to own one piece of the “basket”, and are able to partake in the performance of up to hundreds of different companies in the stock market.

How does mutual funds work in Canada?

In Canada, a mutual fund itself is managed by a fund manager, who often has a team working with them. If you take a look at your bank, or any other financial institution, you’ll discover that there are hundreds of mutual funds available for your choosing in Canada. Each of these funds have a fund manager, and their job is to make the fund perform as well as possible.

A mutual fund in Canada can have various different focuses: for example, you might see a mutual fund which is focused on the healthcare industry. In this mutual fund, the fund manager would look for the best performing healthcare companies listed on the stock exchange. On a daily basis, the fund manager and their team would seek to buy or sell different stocks to keep the performance of the fund up.

Of course, the mutual fund management team will have a fee, which is commonly called the management fee, or the management expense ratio (MER) for their services. This is something that needs to be considered when you decide to investment into any particular mutual fund.

Are mutual funds a good investment in Canada?

For a lot of people in Canada, mutual funds are one of their first forays into the investment world. The great thing about mutual funds is that there is an incredibly wide variety of them. From low risk bond funds, to aggressive growth-based funds, and everything in between. No matter what kind of risk portfolio you belong to, you’ll be able to find something in Canada that’s within your risk tolerance.

Another reason to invest in mutual funds would be if you were more of a hand-off type investor. Because of mutual funds having a management team actively managing your money, you’ll be able to sit back and allow the professionals to do their job. The flip-side of this, is that this management comes with a price. Before you decide to invest into any particular mutual fund in Canada, make sure you understand what fees are charged by the fund, and look at the performance history, net of fees!

How does a mutual fund work in USA?

A mutual fund in the USA works very similarly to mutual funds in Canada. As a Canadian, you do have access to US mutual funds, but it’s not recommended for you to invest in them as there are a lot of complicated tax implications for cross-border investing. However, you’re not missing out on anything as the structure of mutual funds in the USA is the same as mutual funds in Canada. Both have fund managers, and both have up to hundreds of companies’ stocks.

A good compromise, if you want to access US companies, is use mutual funds in Canada which hold US companies.

Types of mutual funds

There are many types of mutual funds. We will list a few below, but keep in mind that there are many more types to choose from!

Index funds

Index funds are mutual funds which tracks a specific index like the S&P 500 or the NASDAQ. Whichever companies make up that index, that’s what the mutual fund will invest into.

Regional funds

Regional funds are mutual funds which are focused on a specific geographical region. For example, you might see a western Europe fund, South America fund, or East Africa fund. As the name suggests, the fund will focus on companies based in those regions.

Resource funds

Resource funds are mutual funds that focus on a particular resource such as crude oil, precious metals, or even commodities like wheat. These funds will focus on companies associated with those particular resources.

Sector funds

Sector funds are mutual funds that are focused on a particular industry such as healthcare, technology, or finance, as an example. As the name suggests, these funds will invest in companies specializing in one particular sector.

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