Annuities are one of the most misunderstood products in Canadian personal finance. Some advisors push them too hard; others dismiss them entirely. The truth is in between — they’re a specific tool that solves a specific problem (longevity risk), and they work great for some retirees, terribly for others. Here’s the honest breakdown.
What an annuity actually is
An annuity is a contract with an insurance company. You hand them a lump sum (say $200,000); they hand you back guaranteed monthly income — either for the rest of your life (life annuity), or for a fixed term (term-certain annuity). Once you buy it, you generally can’t get your lump sum back. The insurer takes the longevity risk; you take the lump-sum-permanence risk.
The main types in Canada
- Life annuity: Pays monthly income for as long as you live. If you live to 95, you’ve made out well; if you die at 67 two years after buying it, the remaining money mostly goes to the insurer (unless you bought a guarantee period — see below).
- Joint and Survivor annuity: Pays for as long as either spouse is alive. Lower monthly payment than single-life, but income continues until the second death.
- Term-certain annuity: Pays for a fixed period — 5, 10, 15, 20 years. Predictable, but no protection against living past the term.
- Guaranteed period (added to life annuity): Pays for life, but guarantees at least N years of payments to a beneficiary if you die early. Common periods: 5, 10, 15 years. Adds 1-3% to the cost.
- Indexed annuity: Payments rise each year by a set percentage (typical: 2%) or CPI. Lower starting payment in exchange for inflation protection.
- Deferred annuity: You pay now, payments start later (5-20 years). Useful for locking in income for future you. Tax treatment varies — speak to an accountant.
How much income does $200K actually buy?
Annuity payouts depend on your age, sex (yes, women get smaller monthly payments because they live longer on average), prevailing interest rates, and any guarantees/indexing you add. Rough 2026 ballparks for a $200,000 single-life annuity with no guarantee period:
| Buyer age + sex | Monthly payment (single-life, no guarantee) | Annualized payout rate |
|---|---|---|
| Male, 65 | $1,250 | 7.5% |
| Female, 65 | $1,150 | 6.9% |
| Male, 70 | $1,470 | 8.8% |
| Female, 70 | $1,350 | 8.1% |
| Male, 75 | $1,800 | 10.8% |
The payout rate (7-11%) sounds great until you remember: part of that is your own principal coming back to you. The actual return component is closer to 3-5%. The other half is “longevity insurance” — if you live to 95, you’ll come out way ahead; if you die at 67, the insurer wins.
When annuities make sense
- You have longevity in your family + no defined-benefit pension. If your parents lived to 90+ and you don’t have a workplace pension, buying a life annuity at 65-70 with 20-40% of your portfolio guarantees you can’t outlive at least part of your money.
- You can’t psychologically handle market volatility in retirement. Some people genuinely panic-sell during 2008-style crashes. An annuity converts that anxiety into a steady cheque — worth the lower expected return if it keeps you in the game.
- You want to floor your basic expenses. “Annuitize enough to cover housing + food + utilities, invest the rest in growth assets.” The annuity covers the floor; the rest of your portfolio funds upside.
- You’re worried about losing capacity later in life. Annuities are autopilot. No portfolio decisions, no rebalancing. Useful if cognitive decline is a worry.
When annuities don’t make sense
- You already have a generous DB pension. CPP + OAS + a workplace defined-benefit pension already provides longevity-insured income. Adding more is overkill.
- You have known health issues or family history of early death. Annuities pay best when you live long. If actuarial tables don’t favour you, buying an annuity is buying insurance against an event unlikely to happen.
- You want to leave a large estate. Annuities consume your principal — once you buy, that lump sum is gone from your estate. If legacy matters, keep the money invested + rely on portfolio withdrawals.
- You’re under 60. The math is worse for younger buyers, AND you’re locking in today’s interest rates for life. If rates rise, you wish you’d waited.
The annuity vs portfolio comparison
A balanced portfolio (60% stocks, 40% bonds) historically supports a 4% safe withdrawal rate. So $200K invested supports $8,000/year (4% of $200K) — vs the $14,000-15,000/year a 65-year-old gets from a life annuity. The annuity wins on income, but you’ve spent the principal. The portfolio keeps growing, can be passed to heirs, but offers no longevity guarantee.
Many planners recommend a hybrid: annuitize 25-40% of your portfolio at 65-70, keep the rest invested. You get longevity-insured income (covers basic expenses) AND retain market upside + legacy potential. When I helped a friend’s mom think through this, she annuitized $150K (covers her rent + utilities for life) and kept $400K invested. Now she sleeps better and still has flexibility.
Where to buy annuities in Canada
- Major Canadian insurers: Sun Life, Manulife, Canada Life, iA Financial, Empire Life
- Through your bank’s wealth management arm (usually marked up — comparison shop before buying)
- Through an independent insurance broker who can quote multiple insurers simultaneously — typically gets you a 5-15% better rate than going direct to one insurer
- Compare quotes: Cannex (cannex.com) is the standard Canadian annuity-rate aggregator. Free quotes; brokers use the same data.
Frequently asked questions
Are annuities CDIC insured?
No — annuities are insurance contracts, not bank deposits. They’re protected by Assuris (the life insurance industry’s protection fund), which covers up to $2,000/month or 85% of promised income, whichever is higher. Has functioned reliably for 30+ years; never had to bail out a major insurer.
Are annuity payments taxable?
Depends on whether you bought with registered (RRSP/RRIF) or non-registered money. Registered: full payments are taxable as income. Non-registered (using a prescribed annuity): only the interest portion is taxable — the rest is considered return of capital. The prescribed annuity tax treatment is favourable and worth structuring correctly with an accountant.
Can I cancel an annuity if I change my mind?
Generally no — most annuities are irrevocable once issued. A small number of insurers offer “with cash refund” annuities that pay your estate the remaining principal if you die early, at the cost of a lower monthly payment. Some offer a 10-day rescission period at purchase, but past that, you’re locked in. This is why annuity decisions deserve careful thought.
How does an annuity compare to just spending down my RRIF?
A RRIF gives you flexibility (can adjust withdrawals, can leave money to heirs) but no longevity guarantee. An annuity gives you guaranteed lifetime income but consumes the principal. Many retirees use both: keep some money in a RRIF for flexibility + emergencies, and annuitize the portion they want guaranteed for life.
Should I buy an annuity now or wait for higher interest rates?
Annuity payouts track long-term interest rates closely. If rates are at a recent low, waiting can make sense — but you’re also delaying lifetime income. A common strategy is “laddering”: buy a small annuity now ($50K), another in 2-3 years, another later, to average across rate environments. Talk to a fee-only planner before committing — annuities aren’t reversible.
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