Financial Focus: The benefits of annuities
By Craig Elder on July 8, 2023.
When interest rates were low, many investors shunned GIC’s as an investment since they were paying very little in return. With interest rates on the rise, many Canadians are taking advantage of the highest rates in 15 years. Most investors are familiar with GIC’s as a secure investment. Unfortunately, they only provide a guaranteed rate of return for a short window of time, usually up to 5 years. An alternative guaranteed investment that has also improved with higher interest rates are annuities. While annuities can provide guaranteed income for life, many Canadians are still reluctant to purchase them as part of their retirement income planning. Purchased through a lump sum payment to an insurance company, annuities provide a pre-set distribution of income, usually on a monthly or annual basis. They are a good alternative for those that want predictability in retirement income. Here are five things to know about annuities: 1. Annuities have a special tax status in Canada Prescribed Annuities can provide tax efficiencies as the income is taxed based on a blend of tax-free return on capital and a prescribed portion of taxable income, which is embedded in the product. These are usually purchased with funds outside of registered account to get a better after-tax return than investing in GIC’s. 2. Annuities can be structured to rise with inflation While one potential drawback of an annuity is their lack of liquidity, some insurance companies offer indexed annuities, which means they’re able to increase in value with inflation over time. 3. Annuities can be held by your corporation Many investors hold annuities in their corporations as a type of self-imposed pension plan. Entrepreneurs build the majority of their wealth in their business. Sometimes that means assets are accumulated in a holding company or their operating company becomes a holding company upon retirement. The holding company can purchase and annuity to create lifetime income in retirement. 4. Annuities can be used for philanthropy Annuities can be used to generate income in retirement, as well as support charitable causes as they may offer preferential tax treatment. Gift annuities offer a fixed income alternative to people who consistently gift cash to charity. By purchasing an annuity, a donor can seek to lower their taxable income, guarantee annual gifts and benefit from donation tax credits for those gifts. Only a portion of the payment is taxable, and it can provide a better return than a GIC or bond. 5. Annuities offer solutions for estate planning One way investors can use annuities in estate planning is to maintain some control on how money is distributed to surviving spouses, children or grandchildren. Annuities can be purchased for the surviving lifetime of the spouse, which is usually recommended if they are older, or for a specified term for children. For more information on annuities and what they are able to generate in after tax income compared to GIC’s please contact us. The information above is not intended as nor does it constitute insurance, legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. A. Craig Elder, CFP, FMA, CIM, FCSI, is a Senior Portfolio Manager and Wealth Advisor with Elder & Punko Wealth Advisors of RBC Dominion Securities Inc. in Medicine Hat. Source material provided by RBC Wealth Management. Insurance products are offered through RBC Wealth Management Financial Services Inc.(“RBC WMFS”), a subsidiary of RBC Dominion Securities Inc.* RBC Dominion Securities is a member of the Canadian Investor Protection Fund. For more information on this and other financial strategies, contact Craig at craig.elder@rbc.com or 403-504-2723. http://www.elderpunkowealth.ca 17-16
