A mainstay of retirement-income planning, annuities have traditionally been looked to by retirees as a way to generate safe and steady payouts from their savings. By locking in a bond-like rate of return, annuitants could look forward to guaranteed payments that would continue as long as they lived.
For sellers, a challenge has long been overcoming the image of annuities as inflexible and unsuitable for people who want a say in managing their retirement savings. In exchange for guaranteed annuity income, buyers often give up the chance to bequeath the remaining value of their savings after their death. What's more, since the level of payouts is generally based on prevailing interest rates, the allure of these income vehicles for Canadians has dimmed further in recent years.
"With interest rates so low and many more withdrawal products available now, the (retirement planning) landscape has changed so much," says John Lutrin, executive vice-president and chief marketing officer with Hub Financial Corp.
Recent innovations aim to address two prevalent criticisms of annuities: low yields and the reluctance by consumers to lock in and give up control of their capital for good. The best known innovations for income-seekers are segregated funds that provide for guaranteed minimum withdrawal benefits.
GMWB funds were pioneered in Canada in 2007 by Manulife Financial, and are now offered by numerous life-insurance companies. They enable investors to benefit from market gains and to retain control of the policy's residual value.
Ironically, a similar bank-designed product, launched in January by Bank of Montreal, has come under scrutiny by regulators, with insurers objecting to the annuity-like features of the deposit-taker's Lifetime Cash Flow product.
Their dwindling popularity aside, says Hub Financial's Lutrin, annuities remain an important investment tool that can be the most suitable option in some circumstances. Hub is a managing general agency that distributes insurance products and services to more than 3,000 independent financial advisors in Canada.
Annuity income is determined primarily by the amount of your deposit, current interest rates, the type of annuity and the features you choose, your sex and age (these are used to project life expectancy), and whether and how much income you choose to guarantee.
Annuities are usually viewed in one way only: as a permanent solution for people worried about outliving their capital. But apart from addressing so-called longevity risk, annuities can solve other specific challenges, says Hub's Lutrin. "When you need guaranteed income to fund something specific -- a structured settlement, for example -- an annuity makes perfect sense," says Lutrin, who has worked on the investment side of insurance in Canada since 1997. "There's definitely a need for that type of income."
Further, despite their reputation for being inflexible, annuities may be tailored to one's personal circumstances. Income payments, for example, may be the same throughout the term of the annuity, or they may increase by a fixed percentage each year, indexed to inflation. Generally, you may also choose the frequency of payments: monthly, quarterly, semi-annually or annually.
Here are the different types of annuities:
Life-only annuity. Also known as a life annuity, this is the most basic version. It guarantees that you'll receive payments for as long as you live. Whether it's decades later or a year after you purchase the annuity, payments stop upon your death.
You may also choose a guarantee period on your life annuity. A longer guarantee period will mean lower income payments since the longer the guarantee period, the greater the number of payments anticipated.
Joint life and last survivor annuity. Often called a joint-life annuity, this type is best suited for couples, since income payments can continue until the death of the surviving spouse. Regulations require that annuities purchased with funds in a registered plan be joint life and last survivor, unless the non-annuitant spouse consents to waive this condition.
Term-certain annuity. With this type of annuity, payments stop after the guarantee period specified in the contract. If you die before the end of the term, annuity payments will continue to your designated beneficiary or to your estate until the end of the term. A term-certain annuity with a 10-year guarantee is one of the most popular annuity options, according to Hub's Lutrin.
Impaired, enriched and enhanced annuities. There are numerous other types of annuities that may be suitable in various circumstances. "Someone may have a severe illness," says Lutrin. "Although it's something a lot of people don't want to think about, a shortened life can make the annuity more attractive." Known variously as an impaired, enriched or enhanced annuity, the main qualification for the higher payouts of this type of annuity is shortened life expectancy. Conditions such as heart disease and diabetes, for example, could be considered.
Deferred annuity: This type of annuity gives the buyer the option to convert to a registered retirement income fund (RRIF) at age 71 or within seven years of purchasing the annuity, whichever is earlier.
Performance annuity. This type allows investors to tie the variable portion of annuity payments to a customized or pre-determined investor profile: conservative, moderate, growth or aggressive.
Cashable annuity. This is the latest twist on annuities. Announced by Canada Life earlier this year, the cashable annuity is being touted as a way to address investors' reluctance to permanently commit to an income plan. The investor has the option of receiving all or a portion of the cash value of their annuity during the guarantee period. The commuted value -- that is, the amount of money as a lump sum that the investor is entitled to -- depends on a number of factors including the annuitant's age and the length of the guarantee period.
While this flexibility seems to go against the grain of annuities, Lutrin is not surprised by the development. "You can do almost anything," he says. "Annuities are a creature of circumstance."
