Question of the Week – What are annuities?

Annuities are financial products that delivers a steady payment to an individual. They are primarily used as an income stream for retired people.

Annuities are not securities. They are insurance products regulated by the provincial insurance regulators. However, many people that place money in an annuity get it from an RRSP or TFSA which may have held securities.

For a retired person, an annuity is a way to ensure a reliable, and if they choose certain annuities, an on-going stream of income. A person can put smaller amounts of money into an annuity to build it up over time or place a lump sum in it for future distribution as income. They can be used to safeguard against longevity risk in investing and ensure that you won’t outlive your wealth.

Annuities can be immediate, or they can be deferred. In an immediate annuity you start receiving payments right away. In a deferred annuity you continue to put money into the annuity with plans to withdraw money at a later date. With a deferred annuity you usually have a surrender period, during which your money is locked in and cannot be taken out.

The length of the withdrawal period can also differ. You can take out a life annuity which will pay you for the rest of your life, or you can get a fixed amount annuity that will pay you for a set number of years. A fixed amount annuity does come with longevity risk.

Annuities also come in fixed income or variable income varieties. A fixed income annuity has a set payment amount that does not change. Under a variable annuity your payments could be indexed to keep up with inflation or be linked to the equities market.

If you’re looking at an annuity to setup a steady income stream in retirement make sure you do your homework and research to find the annuity that is right for you and the lifestyle you want in retirement. Also make sure you research the insurance company you are dealing with. Not all annuities are the same, but once you buy an annuity you usually can’t get your savings out and are locked into the terms you have agreed upon. This includes any payments going in and any payments going out.