Well, maybe it is now time to reconsider the annuity option for at least two reasons. The first is obvious. Most of us have seen our investment portfolios lose ground. Second, but maybe more important, we are living longer – a lot longer in some cases, and the concern of outliving one’s savings is very real.

So, what is an annuity? It is a contract, usually between an insurance company and an “annuitant” who, for a lump sum payment, will receive from the insurance company, a stream of income for life.

There are various types of annuities, and many factors that need to be considered in determining the appropriate type of annuity for you.

Single Life Annuity

A single life annuity will provide you with an income for as long as you live, ensuring that you will never outlive your money. It can also be guaranteed for a certain number of years. Should a premature death occur, the estate will continue to receive the funds at least up to the guaranteed period.

Joint and Last Survivor Life Annuity

This life annuity is payable while either you or your spouse (or common-law partner) are living. When one spouse dies, the survivor can continue receiving income payments as agreed upon when the annuity contract was established. As with the single life annuity, a guarantee period can be written into the contract.

Term Certain Annuity

This type of annuity can be useful for planning ahead when you will require a specific or additional income for a pre-defined period. A term certain annuity provides you with an income for a set period, or until a certain age.

Life Annuity Payment Amounts

The life annuity payment amount is fixed and is based on:

• the amount of money used to purchase the annuity,

• the type of life annuity purchased,

• current interest rates,

• the ages of the annuitant and joint annuitant, if any,

• current long-term bond rates.

The “Prescribed” Annuity

Perhaps the greatest benefit for considering an annuity is for the tax efficiency of the prescribed annuity when using “non-registered” funds. The CRA recognizes that payments received as income from an annuity include both interest and principal. Since taxes have already been paid on the principal, the annuitant will not be taxed twice.

Mathematically, an annuity payment is mostly interest in the early years. The “prescribed” status levels out or defers this interest income. In practice, this is very advantageous. For example, if one purchases a life annuity for $500,000 and receives an annual income of $40,000, the amount that is taxable might be $9,000 (actual income and taxable amount will be based on conditions when an annuity is purchased).

What Can an Annuity Do For You?

• Provide a regular, guaranteed income stream for both you and your spouse for as long as both of you live.

• Create a tax advantage in the case of a prescribed annuity.

• Fund a major expense, such as a mortgage payment.

• Reduce market risk to investable assets by treating an annuity as part of the asset allocation strategy of the portfolio.

• You won’t outlive your money.

Are there any disadvantages to an annuity? Well, yes, there are some things to consider. Once you hand over the cheque to the insurance company, you won’t get it back.

It’s a non-cancellable contract, and you lose control of those funds. The contractual payments are fixed. They won’t go up – but will never be reduced either, except if specified contractually on the death of a spouse. The prescribed annuity is not an inflation-protected vehicle.

How can you determine if an annuity is right for you? Like any investment strategy, one should be working with a competent certified financial planner who can review the various investment alternatives with you, and look at your individual and family needs to determine the most appropriate investment approach.

Certainly, as stated above, if for no other reason than continuing market volatility, and your expectations of a long life, a look at including an annuity within your overall investment strategy might be worth a consideration.