When it comes time to stop working, selecting the best possible income options may be the most important investment decision you will ever make. Annuities can form an important part of a balanced income portfolio, by taking the guesswork out of investing for income. Unlike other income-producing investment options like bonds or GICs, an Annuity can guarantee income for your entire life, providing you with peace of mind by knowing you will never outlive your savings.
What is an Annuity?
Generally speaking, an Annuity is like a mortgage in reverse. Instead of borrowing money, you invest money with an insurance company. In exchange for this investment, the Insurance Company makes regular income payments back to the client that contains both interest and principal. But unlike a mortgage that would end after a period of time, Annuities can continue to provide income for the entire life of the investor and their spouse. In addition, Non Registered Annuities can offer significant tax advantages for clients. Because the interest income can be averaged over the lifetime of the Annuity, there is an attractive element of tax deferral.
There are two major types of Annuities: Fix & Variable Annuity
- A Fixed Annuity is an account which earns a guaranteed rate of interest, regardless of how the economy or the Insurance Company happens to be doing. The rate will not necessarily be very high, but earnings on it can generally be tax-favoured.
- A Variable Annuity provides for more flexibility, allowing the owner to move the invested premiums and earnings between various investment options (essentially mutual funds). Because of the owner-control, no earning rate is guaranteed -- it may even lose value in a down economy, or if you make unfortunate investment decisions.
The Fixed Annuity has two primary distribution classes.
- A single premium immediate annuity is secure, periodic income that you receive for a specific period or for your lifetime. Highly volatile stock markets and low short-term interest rates make it a sound choice. Since it is important to guarantee the payment of your fixed expenditures throughout your lifetime, a single premium immediate annuity is the ideal type of investment to help you reach this goal without risk.
Who should consider a Single Premium Immediate Annuity?
- Persons wishing to convert a portion of their savings to a guaranteed fixed income.
- Single premium immediate annuities are available from life insurance companies only.
- There are several types of immediate annuities, adapted to your needs.
- Your periodic income is guaranteed.
- You receive an income for a specific period or for your lifetime.
- You avoid passing on certain legal fees to your heirs by designating a beneficiary of your annuity contract (probate, fees, for example).
- A Deferred annuity is more in line of how you normally think of an investment. You make regular payments to it for a number of years, and its value goes up (definitely if fixed, and hopefully if variable). After that period, it begins making payments to you, or it may even be transferred back to you as a lump sum.