Annuities
Converts a lump sum of savings into a guaranteed, predictable income stream.
The basics
An annuity is a contract with an insurance company: you hand over a lump sum, often from retirement savings, and in exchange receive a stream of guaranteed income.
A life annuity pays out for as long as you live, protecting you against the risk of outliving your savings. A term-certain annuity instead pays out for a fixed period, regardless of how long you live.
Income can be structured as level (the same amount every payment) or indexed (rising over time to help keep pace with inflation), a trade-off between simplicity and long-term purchasing power.
Step by step
- You choose the amount to annuitize, the lump sum you are converting into income, and the type of annuity: life or term-certain. This decision is generally permanent, so it is worth only annuitizing money you are confident you will not need as a lump sum again.
- Underwriting for a standard annuity is minimal, since the insurer is not taking on mortality risk in the way life insurance does. Some insurers offer enhanced payouts if health information reveals a shorter life expectancy, since the insurer expects to pay for fewer years.
- You select payment options: level or indexed income, and whether to add a guarantee period (payments continue to a beneficiary for a minimum number of years even if you die early) or joint coverage (payments continue to a surviving spouse).
- Once the contract is issued, you receive scheduled payments, monthly, quarterly, or annually, for the life of the contract. This income is generally partly taxable and partly a tax-free return of your original capital, depending on how the annuity is structured and whether it was purchased with registered or non-registered funds.
- On a life annuity, payments simply continue for as long as you live, with no further action required. On a term-certain annuity, payments stop once the fixed term ends.
What drives the cost
- Your age and sex at purchase, since payout rates are calculated on life expectancy
- Prevailing interest rates at the time of purchase, which directly set annuity payout rates
- Life annuity vs. term-certain, and the length of any term chosen
- Level vs. indexed payments (indexed starts lower but rises over time)
- Guarantee period or joint coverage added, which reduces the payout in exchange for the added protection
Life annuity vs. term-certain annuity
| Life annuity | Term-certain annuity | |
|---|---|---|
| Payment duration | For life | Fixed period |
| Outliving-savings protection | Yes | No — payments stop at term end |
| Payment structure options | Level or indexed | Level or indexed |
How the mechanism works
Is this a fit?
- Retirees who want a guaranteed income floor for essential expenses
- People concerned about outliving their retirement savings
- Anyone who prefers predictability over flexibility for part of their savings
Things to keep an eye on
- Irreversibility: annuitizing locks in the decision, so consider annuitizing only a portion of your savings rather than the full amount
- Inflation erosion on level payments: a level annuity's purchasing power declines over a long retirement unless you choose the indexed option, which starts lower
- Interest rate timing: since payout rates track prevailing rates at purchase, some retirees stagger annuity purchases over several years rather than committing a lump sum at a single point in time
- No liquidity for emergencies: once converted, that capital is no longer available as a lump sum for unexpected large expenses
FAQs
What happens to my money if I die shortly after buying a life annuity?
Without a guarantee period, the payments simply stop and no further amount is paid to your estate, which is the trade-off for the higher payout rate. Adding a guarantee period, commonly 10 or 15 years, ensures payments continue to a beneficiary for at least that long, for a somewhat lower monthly amount.
Can I get my lump sum back after buying an annuity?
Generally no. Annuitizing is typically an irreversible decision, which is why it is worth only converting money you are confident you will not need as a lump sum again, and keeping other savings liquid.
Why do annuity payout rates change so much over time?
Payout rates are closely tied to prevailing interest rates when the contract is purchased. Higher rates generally mean higher annuity payouts, and vice versa, which is why timing purchases around rate environments matters to some retirees.
Is annuity income taxed the same as other retirement income?
It depends on the source of funds. An annuity purchased with registered money (like an RRSP) is generally fully taxable as income. One purchased with non-registered savings is often partly taxable and partly a tax-free return of capital. Confirm the specific tax treatment with a tax professional.
What is a joint life annuity?
It continues paying, often at a reduced amount, to a surviving spouse after the first annuitant dies, rather than stopping. It is a common choice for couples wanting to ensure the survivor keeps a guaranteed income floor.
Can I buy an annuity with only part of my retirement savings?
Yes, and many retirees do exactly this: annuitizing a portion to cover essential fixed expenses while keeping the rest invested and flexible for discretionary spending and emergencies.
Robert is 65, recently retired, with $400,000 in savings split across registered and non-registered accounts. He wants to be certain his essential monthly expenses, roughly $2,000, are covered no matter how long he lives or how markets behave, while keeping the rest of his savings invested for flexibility and larger discretionary spending.
He annuitizes $200,000 into a joint life annuity with his wife, ensuring payments continue to her if he predeceases her, choosing a level (non-indexed) payment structure for simplicity.
In year 1, he begins receiving roughly $1,100 per month, or about $13,200 for the year, guaranteed regardless of what markets do with his remaining $200,000.
By year 10, he has received roughly $132,000 in cumulative annuity payments. His remaining invested savings have grown and shrunk with markets along the way, but his essential monthly expenses have never been at risk, since the annuity income kept flowing every single month.
By year 25, at age 90, he has received roughly $330,000 in cumulative payments, well beyond his original $200,000 lump sum, since the annuity has simply kept paying for as long as he has lived. His invested savings have been drawn down more carefully over the decades, knowing the essential expenses were always covered separately.
When Robert eventually passes away, his wife's joint annuity payments continue uninterrupted, ensuring she is never without that guaranteed income floor, exactly as the couple planned when they set up the contract at 65.
Actual rates depend on health, age, and underwriting. Contact Achyut for a personalized quote. Figures are rounded for illustration and will differ from your actual quote.
Achyut is an independent LLQP-licensed advisor, not a branch representative tied to one company. That means comparing products across insurers for your actual situation, not selling from a single proprietary shelf.