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Annuities

A life annuity pays an income for life. This solves the risk of living to a very old age and running out of money. There are several types of annuities:

Single life pure annuity:

Income stops when you die, even if you die in six months.

Single life with a minimum guaranteed period of time:

Such as life guaranteed 5 years, 10 years or 15 years, etc.

Joint-life:

Pays an income as long as one spouse is alive. Again - there can be guaranteed periods.

Term Certain:

Pays for a fixed period of time. This is not based on your life expectancy.

Prescribed annuity:

An annuity personally owned and purchased with non-registered money is called a prescribed annuity. The taxable interest portion of the annuity income is level for life, and can provide an improved after-tax income and can be purchased with guaranteed periods. Registered funds from an RRSP, RPP, locked-in RRSP or DPSP may be used to purchase annuities.

Prescribed annuity example:

A male, age 75 years uses $100,000 of non-registered money and purchases a prescribed annuity, guaranteed for life and five years in any event. Quotations vary daily with changing interest rates. This quote was dated April 9th, 2010, when interest rates were historically very low.

Monthly income for life generated 5 years = $840
Taxable portion = $97

At age 75 years, you may consider using a portion of your non-registered funds in GIC's and purchase a life annuity to increase your after-tax income.