What is an annuity in Canada? Let us Help

May 11, 2022
What is an annuity in Canada? Let us Help

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!

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