Annuity contracts are among the financial products and securities whose attractiveness is enhanced by rising interest rates. This is the case with the life annuity, which is regaining panache with, in its sights, a little nod to the insured annuity.
From the outset, Sylvain De Champlain talks about a long crossing of the desert. 10, 15 or even 20 years of long drought in the world of annuities, struggling with low interest rates. “When you transform your capital into retirement income at rates of 2 or 3% for the rest of your life…” The president of De Champlain Financial Group looks at the rates on a guaranteed investment certificate which can today reach 5 .25% to glimpse currently revitalized annuity strategies, more so with a view to a possible downward movement in the cost of money in line with the return of inflation towards the Bank of Canada’s target. “They are reappearing on the radar of retirees, particularly those who have a more cautious profile and a penchant for income security. »
This universe is made up of several disbursement methods. We are thinking in particular of life annuities, which end upon death, of certain annuities, the payment of which is made to the heirs if their holder dies before the predetermined date, of reversible annuities, paid to the annuitant throughout his life, then to his spouse until upon his death, or to prescribed annuities, involving the provision of unregistered funds. Between the life annuity and the certain annuity there is a whole range of options and terms. We can think of a guaranteed life annuity, or even with indexation according to the cost of living, a reduction in annuity payments on the death of the spouse or at the start of payment of the old age security pension, And so on.
There are several variants or combination games, but it is useful to remember that the more guarantees there are, the lower the annuity payments will be.
Insured pension
Among this slew of options, De Champlain’s financial planner and approved life insurer also highlights the insured annuity. Reduced to its simplest expression, it takes the form of a prescribed life annuity combined with permanent life insurance. The combination of these two products offers both guaranteed income – for life or for a predetermined period, depending on your choice – and capital preservation.
The insured annuity, however, uses non-registered funds, losing its tax advantage compared to sums that would come from registered investments. It offers the advantage of having a leveled tax bite during your retirement if it is subscribed from a non-registered account. It allows you to receive tax-advantaged income since only a fraction of the annuity income, i.e. the interest portion, is taxable. “This way, you obtain a higher after-tax income than if you invested your money in a fully taxable investment, such as a guaranteed investment certificate,” explains Sylvain De Champlain in his blog.
Privileged tax treatment and leveled tax collection are more sought after by rentiers. Simply put, in the case of a prescribed annuity, the payments are made up of capital and interest, and the latter are taxable according to a level amount spread over the duration of the annuity contract. In the case of a non-prescribed annuity, interest is taxable as it accumulates. As a result, the tax will be higher in the first years, then decrease over time, we read on the Royal Bank website.
Obviously, it is recommended not to rely solely on the insured pension to guarantee a good retirement. The old adage “don’t put all your eggs in one basket” applies, because the disadvantage of an annuity comes from the fact that the holder cannot change the payments once the contract is signed. And if the indexation option is not retained, they suffer the erosion of inflation. “It provides protection against price volatility, peace of mind, predictable and regular income, but little flexibility,” summarizes Sylvain De Champlain. We prefer a breakdown of one third of the portfolio for the annuity, and two thirds for a traditional portfolio. »
As for the insurability aspect, “each case is unique and the insurability of the annuitants will determine the feasibility and relevance of setting up an insured annuity. It is therefore important to take out the insurance policy before taking out the annuity,” continues the financial group’s blog. On the other hand, if the annuitant’s state of health is more fragile, taking out the life annuity and life insurance with the same insurer can make things easier. We can understand why in the event of a premature death. It is also important to remember that the life insurance premium will increase the older the retiree gets, the ideal stratum being 65 to 70 years old.
To sum it all up, the insured annuity may be suitable for the retiree who is looking for the prescribed taxation and who wants to be protected by a life annuity and preserve the capital for his or her heirs.