Life Annuities

Two conditions come with that promise of lifelong income, paid monthly or, on some contracts, quarterly or yearly. The first is access: once payments begin, the money is committed, so an annuity is for money you will never need back as a lump sum. The second is tax: what you owe depends on whether the money came from an RRSP or RRIF or from savings that were already taxed, and on the terms of the particular contract.

A life annuity is insurance against living too long. That makes it the mirror image of life insurance, and it is why the same companies issue both. What follows is how it works, what each option costs you, the Canadian tax rules with links to the law, what you give up, and the written quotes to compare before you sign.

What is a life annuity, and who owes whom?

A payout life annuity exchanges a purchase price for the insurer's promise of income. It is an insurance contract, not a deposit or an investment account from which you can withdraw a balance; cancellation or commutation, if any, depends on the contract. The Autorité des marchés financiers says it plainly: in most cases, the money you use to buy an annuity no longer belongs to you (AMF, life annuity and annuity certain).

• You pay a premium, usually one lump sum, to a life insurer.
• The insurer calculates a payment from your age, your sex and health, the amount you pay, interest rates on the day, its own assumptions and the options you choose.
• Payments begin right away, or on a later date, within limits set by tax rules and by the insurer.
• They continue for as long as you live, or as the options you chose provide.

After you pay, you owe the insurer nothing more, and the insurer owes you the payments the contract describes. There is no loan and no balance that belongs to you. What you own is a promise, and a promise is only as good as the company that makes it, which is why the protection that stands behind Canadian insurers is set out further down.

The risk has moved: the insurer has taken on the chance that you live to 95 or 100, and that transfer is the product. The Financial Consumer Agency of Canada explains the same mechanics, and the questions to ask, on its page about annuities.

Which choices change the payment?

Most options trade some monthly income for another kind of protection. The choices are made once, when you buy, and they stay with the contract for life, so this is the table to settle before anything else. The last column matters only for non-registered money, where the tax treatment depends on whether the contract can be a prescribed annuity contract (explained in the tax section).

The guarantee period is easy to misread. It guarantees a number of payments, not the return of your capital, and it lowers the monthly amount to pay for that. What it answers is one specific fear: buying an annuity and dying the following year. The cash refund option answers a similar fear in a different way, with a lump sum instead of continued payments.

On indexing, read the contract rather than the label. Many contracts raise the payment by a fixed percentage chosen at purchase; whether a contract linked to the consumer price index is available is a question for the issuer on the day you ask. Illustrative example. Assume prices rise 3% a year. After 24 years, a level payment buys about half of what it bought at the start (1 divided by 1.03 to the power of 24 is about 0.49). The 3% is an assumption for the arithmetic, not a forecast, and it shows why an indexed payment that starts lower can still be worth pricing.

With non-registered money, some options conflict with the tax treatment. A prescribed annuity must pay equal amounts at regular intervals, at least once a year, and your rights under it may not be disposed of, for example by surrendering or commuting the contract, except on death (Income Tax Regulations, s. 304(1)(c)(iv)). An indexed contract, or one you can cash in later, will therefore generally be taxed on accrual instead. Ask the insurer to quote the prescribed and indexed versions separately, with the tax reporting for each, so you can see what the rising payment costs you in tax as well as in the starting amount.

RRSP and RRIF money has its own limits. For an annuity bought with RRSP money (and generally RRIF money, which the issuer will confirm), a guaranteed term cannot exceed 90 minus your age at the start, or a younger spouse's age if you so elect, and indexing is limited to increases in the Consumer Price Index or a stated rate of no more than 4% a year (Income Tax Act, s. 146, "retirement income" and s. 146(3)(b)(iv)). Locked-in pension money may carry further limits; ask the administrator.

If your health could shorten your life expectancy, ask an annuity specialist whether any available issuer offers an enhanced quote for your health and province. This is one of the few places where underwriting can work in your favour, so tell the insurer about the condition rather than leaving it out. Availability varies from one issuer to the next, so compare as many comparable written quotes as you can obtain.

How is the payment calculated, and why do quotes differ?

Not as a rate of return, which is the misunderstanding that makes annuity quotes hard to compare with anything else. A standard payout annuity pays no policy dividends and builds no cash value. Three things determine the payment.

• Your life expectancy at purchase, from the insurer's mortality assumptions. A 75-year-old receives a much higher monthly payment than a 65-year-old for the same amount, because the payments are expected to last fewer years.
• Interest rates on the day, meaning what the insurer expects to earn on your money over that period. This is why quotes move with bond yields, and why the same person gets a different answer in different years.
• Pooling, often called mortality credits. In plain money terms: the money of members who die earlier than expected helps pay the members who live longer. That pooling is what lets a life annuity promise income for as long as you live.

Why a quoted percentage misleads. A payout percentage is not an investment yield. Illustrative example: if $100,000 buys $6,000 a year, the annuity "pays 6%", but that is not a 6% return, because each payment can include part of your own purchase price coming back, some interest, and the effect of pooling. The proportions depend on the contract and on how long you live. Compare payments with payments, never a payout percentage with a return on savings.

Quotes for the same contract differ between insurers on the same day, because each prices its own assumptions; the Financial Consumer Agency of Canada lists the provider among the things that set your payment. How the seller is paid varies by issuer and contract; ask each seller for its written disclosure of fees and commissions. A quote from one company is not the market, and the difference between two quotes lasts for as long as the payments do.

How is a life annuity taxed in Canada?

American rules (Social Security, the IRS, FDIC insurance) do not apply in Canada. Two questions decide the Canadian answer: where the money came from, and whether the contract is a prescribed annuity contract.

Registered money. An annuity bought with RRSP or RRIF money is fully taxable as income when you receive it. None of the payment is treated as a return of capital, because none of that money was taxed on the way in.

Non-registered money. Each payment is partly your own purchase price coming back, which is not taxed, and partly income, which is. How the income part is spread over the years depends on the contract. If it is prescribed, the taxable part is level: the same each year while the payments stay level. If it is not prescribed, section 12.2 of the Income Tax Act can require an amount, if any, calculated under that section to be included on each anniversary day of the contract, which can bring more of the taxable amount into the early years (s. 12.2(1)). Check the issuer's annual reporting: payment reporting also depends on the contract, so do not assume a positive inclusion every year. Over a lifetime the total tax can differ between the two treatments, so ask the issuer for a year-by-year tax reporting schedule, before and after payments start.

What makes a contract prescribed. The conditions are in section 304 of the Income Tax Regulations, not in the Act itself. That section has separate branches; for an ordinary non-registered contract, paragraph 304(1)(c) applies. In short, payments must have begun; each holder must be an individual (other than a trust) or one of certain specified trusts, must be an annuitant under the contract and must deal at arm's length with the issuer; the payments must be equal and made at regular intervals, at least once a year; any guaranteed or fixed term cannot exceed 91 minus the relevant age when the contract was first held, and on a joint or joint and last survivor contract that can be the younger person's age (s. 304(1)(c)(iv)); no loans may exist under the contract; and the holder's rights cannot be disposed of except on death. Subsection 304(2) allows certain exceptions, such as a lower payment after the first death on a joint contract, or a refund on a death at or before 91 capped at premiums paid less payments made. The terms of the contract are fixed when you buy it, so confirm prescribed status in writing before you sign.

Illustrative example. Assume a non-registered prescribed annuity pays you $12,000 a year, and the issuer's tax reporting shows $9,000 of it as a return of your purchase price and $3,000 as income. You report $3,000 of income that year. Assume, in this simplified example, that the issuer reports $3,000 for each illustrated year in which the contract remains eligible and payments stay level. Your issuer's written reporting, not these invented figures, governs your return.

Two more points belong in the conversation with your accountant. Annuity payments can count toward the pension income amount on line 31400 of your return if you are 65 or older, and before 65 only in limited cases, such as payments received on the death of a spouse; the same page covers pension income splitting (Canada Revenue Agency, line 31400). Ask as well how the added income affects your Old Age Security and, in Quebec, your provincial return. None of this is tax advice, and this practice does not provide it; the rules are linked so you can read them yourself.

What a life annuity protects you from

Income that cannot run out. A life annuity transfers, by contract, the risk of outliving your income to the insurer. You are not alone in holding that kind of protection: CPP or QPP, and a lifetime defined benefit pension if you have one, already pool the same risk for many families. Count that existing guaranteed income first, because it tells you how large a gap, if any, is left to fill.

Simplicity. No rebalancing, no worry about a bad market year early in retirement, and no yearly withdrawal decision.

Protection against your own future decisions. Managing money well at 70 does not mean managing it well at 88. Cognitive decline is a real risk to savings that someone has to manage into advanced age, and an annuity asks for no management at all once it is in force.

Pooling. The Financial Consumer Agency of Canada describes each payment as a mix of interest, a return of your capital, and a transfer from annuity holders who die earlier than expected to those who live longer (FCAC, how annuities work). Someone drawing on their own savings receives no such transfer, which is why an annuity can pay more each month than you could safely draw on your own.

What a life annuity costs you, beyond the price

Access to the money, usually for good. This is the largest trade. Once the contract is in force, the money has become income. Some contracts permit commutation in narrow circumstances, usually at a discount. Your contract may also have a cooling-off period during which you can cancel without penalty, as the Financial Consumer Agency of Canada notes; ask how long it is before you pay, and do not assume there is one.

Anything for heirs, on a plain life annuity. A guarantee period, a cash refund or a joint structure changes this, and each usually lowers the payment.

Purchasing power, on a level payment. Twenty years of even moderate inflation noticeably reduces what the same monthly amount buys. Indexing addresses it and costs a good deal at the start, in the form of a lower first payment.

The chance to reprice. Interest rates on the day you buy are locked into the payment for life. You cannot reprice the contract if later quotes improve; waiting, for its part, can also mean missing payments or facing worse quotes. The timing section below sets out how to compare the two with dated quotes rather than a forecast.

Flexibility. The money is not available for an emergency, a medical expense or an opportunity. That is the exact reverse of the certainty the product buys, and the two cannot be separated.

Independence from the insurer. The payments depend on the insurer's solvency. Protection exists if a member insurer fails, and its limits are set out in the section on creditors and Assuris below.

When to buy, and whether to buy in stages

Age raises the payment: waiting from 65 to 75 raises the monthly amount a great deal, at the cost of ten years of payments not received and ten more years of managing the money yourself.

Interest rates on the day are locked in permanently. You cannot know in advance whether rates will be higher or lower next year.

Buying in stages reduces how much rides on a single purchase date. You buy part now and part later, perhaps in two or three steps. It may defer some income, and the money not yet committed stays exposed to other risks in the meantime. Compare buying everything now, buying in stages and waiting, using dated quotes that are otherwise identical. None of the three is guaranteed to pay more overall.

Health is an input too: see the enhanced option in the options table.

How much, if anything, should become lifetime income?

Buying an annuity does not have to be all or nothing. One alternative is partial annuitisation: turning only enough savings into lifetime income to cover the spending that has to happen regardless, and keeping the rest accessible. It gives you a floor and makes the irreversible part smaller. Work out the gap before looking at any quote.

RRSP money at 71. By the end of the year you turn 71, RRSPs must be withdrawn, transferred to a RRIF, used to buy an annuity, or a combination (Canada Revenue Agency, options for your RRSPs). A withdrawal is taxed in full that year; a RRIF keeps the money accessible, with a minimum withdrawal each year, and leaves the risk of a long life with you; an annuity passes that risk to the insurer and ends access. They are described, not ranked. A registered alternative is the advanced life deferred annuity (ALDA): a life annuity bought by direct transfer from an RRSP, RRIF or certain pension plans, with payments starting as late as the end of the year you turn 85. Transfers are limited to 25% of each plan's value and to a lifetime dollar limit the Canada Revenue Agency publishes; ask whether any issuer offers one. Starting a public pension later also raises a lifetime amount; the government pages give the current figures for the CPP, QPP and OAS.

Then ask one test question: after the purchase, what income and what savings do you still have that are not tied up in the annuity? If the answer is very little, the proportion committed is probably too high for comfort, whatever the payment looks like.

Still saving? A payout annuity is usually bought with a lump sum when income is needed, and many providers set a minimum purchase (FCAC). Illustrative example: setting aside $20,000 a year for five years is $100,000 contributed, before any interest, tax, costs or withdrawals; that figure says nothing about what annuity it would buy, or when. A surplus alone does not show an income gap. If you are also considering a separate life insurance policy, its need, underwriting and continuing premiums are a separate decision. Questions about registered plans or securities belong with someone registered to advise on them; this practice is licensed for insurance and ranks neither a policy nor an annuity against them.

Annuities and life insurance: opposites that can work together

They are structural opposites, which is worth saying plainly because the same companies issue both. The simplest form of the insurance side is term life insurance, which covers dying too soon for a fixed period and nothing else.

Some retirement plans use both, in a structure often called an insured annuity. It is two separate contracts, which may come from the same insurer or from different ones, each with its own premium. The annuity pays you an income for life. A separately priced life policy may leave a death benefit if it is issued and kept in force; it does not restore the annuity purchase price. It needs underwriting and may be refused, or offered at a higher premium, and if it cannot be obtained or its premiums stop, the structure is simply an annuity. Apply for the life insurance first, and buy the annuity only once the policy is issued, since the insurance may be refused.

Anyone proposing it should show the guaranteed death benefit and every required premium beside the annuity alone and the annuity with a guarantee or survivor option, and what happens if the insurance is declined or premiums stop. Guaranteed values and non-guaranteed values belong in separate columns; on a participating policy, dividends are not guaranteed. A borrowed version of the structure adds a lender and more risk, set out in the 10/8 arrangement and the leveraged insured annuity.

Read this section knowing who wrote it. The author of this guide is paid by commission from the insurer when a life insurance policy is issued, including the kind of permanent policy this structure uses. Weigh the case for adding insurance with that in mind, and ask each seller to disclose how they are paid on each piece.

A workplace pension is an annuity decision too

"Life annuity pension" usually describes the choice a defined benefit plan offers at retirement, which works like a life annuity provided by the plan. The same questions apply: single life or joint, whether a guarantee period is attached, and whether it is indexed. The difference is that a workplace pension is governed by its plan terms and by pension law, not by the rules for annuities you buy from an insurer.

In a plan supervised by Retraite Québec, if you have a qualifying spouse, the plan provides a joint and survivor pension of at least 60% for that spouse, and your own pension may be reduced to account for it. For the higher single life pension, your spouse must renounce that form before payments begin; other waiver rights depend on the benefit, the plan and its governing rules, so ask the administrator which form and deadline apply before either of you signs (Retraite Québec, forms of pension).

Elsewhere, check the rule where your plan is registered: a plan under federal pension law follows that law, and each province sets its own. Ask your administrator for both payment options in writing and for any consent or waiver form, and ask which rules apply if locked-in pension money is used to buy an annuity.

Then make the reduction visible as a number. Ask for the payment as a single life pension and as a joint and survivor pension, and then ask what income your spouse would actually have if the higher option were taken and you died first. A spouse who signs a waiver should see that number before signing.

Creditors, Assuris and the Quebec rules

Creditor protection is possible, not automatic, and naming any beneficiary is not the test. Outside Quebec, provincial insurance law generally protects your rights under an insurer's contract only while a beneficiary from the family class that law defines, close relatives such as a spouse or child, is designated; ask whether that covers your annuity. Protection can be set aside where a purchase was made to defeat existing creditors. More is in the designation and what a creditor can reach; have a lawyer, or a notary in Quebec, review the contract and the designation.

Quebec has its own rules. The rights under the contract are exempt from seizure while the designated beneficiary is your married or civil union spouse, a descendant or an ascendant (Civil Code of Québec, art. 2457). Designating your married or civil union spouse is irrevocable unless the designation says otherwise (art. 2449); how and where it was made can matter. Your public pension is the QPP, administered by Retraite Québec. The Autorité des marchés financiers certifies representatives and supervises Quebec-chartered insurers, while a federally chartered insurer is supervised by the Office of the Superintendent of Financial Institutions (OSFI). More on the province is at life insurance in Quebec.

Assuris. If a member insurer fails, Assuris protects a payout annuity up to $5,000 a month or 90% of the promised monthly income, whichever is higher (Assuris, payout annuity, read 25 September 2026); a $6,500 payment would be protected at $5,850. A payment that rises under the contract, for example with indexing, is protected based on the payment being made at the date of failure. Before splitting a large purchase between insurers, ask Assuris or the issuing insurers to calculate protection for your named annuitants and every benefit you already hold with each insurer; do not assume the $5,000 threshold applies afresh to every contract. Assuris is funded by the industry. It is not a government guarantee, and CDIC deposit insurance does not cover insurance contracts.

Compare like-for-like written quotes

Ask for written quotes from several insurers on the same day, for exactly the same contract. Any difference in the terms makes the payments incomparable, and a difference in the payment, once you sign, stays with you for as long as you live.

The payment cells are blank on purpose. Only a dated written quote from an insurer can fill them, and a payment figure taken from anywhere else is not something to decide on. Once the table is complete, the differences between the columns are the price of each choice, and you can see them. With non-registered money, ask for the level and indexed versions quoted separately, each with its tax reporting.

Questions to ask before you sign

Each question below produces an answer you can write down and compare.

1. What is the monthly payment from each insurer, in writing, for exactly the same contract?
2. What is the payment on each structure I am considering: single life, joint and survivor, with a guarantee period, and with a cash refund?
3. Is this contract a prescribed annuity contract, and will you confirm that in writing? If I add indexing or a right to cash in, does it stay prescribed?
4. What happens if I die next year, and what happens if I die in year twelve?
5. Is there a cooling-off period, how long is it, and can the contract be commuted later, on what terms?
6. Is the payment level or indexed, and by what method?
7. How are you paid on this contract, and what fees and commissions apply? Please put it in writing.
8. What does Assuris protect for this contract, and how would my benefits with this insurer be counted?
9. What income and savings will I still have that are not tied up in the annuity?

If a seller cannot answer one of these questions, that is information too. Some questions belong to other people, and knowing who answers what saves you from taking a tax or legal answer from the wrong desk.

Who answers which question

• The insurer or annuity representative: the payment, the options, prescribed status confirmed in writing, the cooling-off and cancellation terms, and how the representative is paid.
• Your accountant: the taxable part of each payment, the pension income amount and pension income splitting, the effect on Old Age Security (including the recovery tax), and any corporate question.
• A lawyer, or a notary in Quebec: the beneficiary designation and creditor protection.
• Your pension administrator: the joint and survivor forms, any waiver your spouse is asked to sign, and the rules for locked-in money.

Common misunderstandings

That the insurer profits when you die early. The pooling is the design. Early deaths help fund the payments of those who live long; that mechanism is what makes the lifetime promise possible, and it is disclosed, not hidden.

That every option fits the tax treatment you were told about. Check the last column of the options table against each quote.

That it can be undone if circumstances change. In most cases it cannot, outside any cooling-off period in the contract, and this is the assumption that causes the most regret.

That inflation protection is unaffordable. It is expensive at the outset, and it addresses the risk most likely to matter over a long retirement. The comparison worth seeing is the indexed and level quotes side by side, with the level payment's buying power worked out twenty years ahead.

Who a life annuity suits, and who it does not

A life annuity can suit you if:

• Your guaranteed income does not cover your essential spending.
• People in your family tend to live a long time.
• You have no strong wish to leave that part of your savings to heirs.
• You prefer certainty to control, and would rather not manage the money into your late eighties.

It suits you poorly if:

• Your guaranteed income already covers essential spending, so the product would solve a problem you do not have.
• You want to leave that capital to your family.
• You may need the money for a medical expense, a family situation or an opportunity.
• You are buying young, and locking in decades of inflation risk at a payment calculated on a long expected period.

If you sit between the two lists, partial annuitisation is usually the question to look at, with the worksheet above. Finding out that the answer is no, or not yet, before you sign costs you nothing.

How this practice is paid, and your next step

Services come from Canadian Wealth Creation Centre Inc., the firm that publishes this educational website, in Quebec, Ontario, Alberta, British Columbia, Manitoba and New Brunswick. A meeting can review whether an annuity, insurance, both or neither fits your gap. If the firm arranges a payout annuity, its representative is paid by the issuing insurer; ask for that compensation in writing before you sign. A commission is also paid when a life insurance policy is issued, including the permanent policy in an insured annuity, as stated on the author page.

For the purchase itself, the Financial Consumer Agency of Canada suggests comparing quotes from several providers; do that with a representative who places payout annuities. Bring your CPP or QPP, Old Age Security and pension statements, your list of essential spending, the amount you are considering and where it comes from, your spouse's age if a joint option matters, and the quote table above. Ask for written quotes, the prescribed status in writing, and the fees and commissions.

Need a death benefit as well as lifetime income? Read how whole life insurance differs; it is a separate purchase.