When it comes to retirement planning and protecting family wealth from generation to generation, Annuities should warrant consideration as a viable alternative to other retirement vehicles. Let’s examine five reasons why.
Five key reasons Annuities can play a useful role In retirement.
When it comes to retirement planning and protecting family wealth from generation to generation, Annuities should warrant consideration as a viable alternative to other retirement vehicles. Let’s examine five reasons why.1
Consider you have an RRSP balance that you want to turn into a lifetime income stream. The pragmatic choices are to transfer the RRSP balance to a Registered Retirement Income Fund ( RRIF ) or buy an Annuity. A majority opt for the RRIF in the belief that it offers higher returns, greater flexibility and more control than the alternatives. Annuities, which provide a guaranteed income for life are often dismissed as being high-priced products that enrich Insurance companies and pay out a meagre allowance to the annuitant. Plain and simple it’s a bad rap. A risk-averse consumer afraid of living longer than their nest egg may allow, should value an annuity that assures income for life.2
Rather than seeing an Annuity as a form of insurance against running out of money before death, consumers fear that they’ll die before they have received the full value of their investment. In place are options however that can alleviate these concerns. Annuities are available in different classes, such as Principle Protected Annuity, Joint & Survivor Annuity, Term Certain Annuity as well as your Single Life Annuities. Annuities can be set up so that if you die before you exhaust all your funds, you could name a beneficiary that would receive whatever was left in the Annuity contract. On the flip side, you continue to receive guaranteed income, which could accumulate to more than you originally invested.3
One of the arguments of RRIFs versus Annuities is assets in an RRIF can be seamlessly transferred to a surviving spouse. Such is also the case though with Principle Protected, and Joint & Survivor Annuities. A real concern with RRIFs however is the fear of running out of money because of the increasing minimum withdrawal requirements. Minimum withdrawals start at 7.38 per cent at age 71 and increase to 20 per cent beyond 90. These rules do not apply to Annuities.4
Let’s consider the case of a minimal withdrawal for an RRIF of $100,000 at age 75 would be $7,850. An Annuity of $100,000 would produce an annual income of $10,000 and eliminates the worry that the money will run out to soon. “ More income and less worry is a hard combination to beat.”5
In a non-registered environment because Annuities can be considered entirely return of principal, there would be no interest income to include in your tax return. Therefore the income payments would be tax-free, even if they exceed the original investment.
Tax efficiency is one of our core concepts at RSA Financial Services remembering that it is not just what you make, but also what you keep. Also food for thought, when you think about it, we insure our house, car, boat, business, etc. Why would we not insure at least a portion of our retirement? For more information on Annuities, “Get in touch with RSA Financial.”