There are some risks you should think about before you buy an annuity. Understanding these risks could affect the kind of annuity you buy. You may even decide that an annuity is the wrong product for you.
Top five risks of annuities
1. Not having enough income
Before you buy, make sure you can live on the income you'll get. If you buy when interest rates are low, you will be locked in to lower payments.
To reduce the impact of low rates, one strategy is to ladder (or stagger) your purchase. This means that instead of buying one big annuity, you plan to buy several smaller ones over a few years. If rates rise, you end up with a higher total annuity income.
Tip: There's no guarantee interest rates will rise over the years. That's why some people don't buy annuities. They prefer to invest their savings, and try to get more income that way.
2. Not being able to change your contract
Once you buy an annuity, there's no changing course. What if you have a health crisis or a major repair bill? With an annuity, you can't change your payments, or get your savings back, even if you need more money.
3. Paying for more than you need
As you add options, your income drops. Some options will be worth it to you, but can you afford to buy extras you don't really need? If you have life insurance, for example, you may not need a joint-and-last-survivor life annuity. If you have other savings when you retire, you may not need an indexed annuity.
4. Having less to spend as the years pass
When you buy an annuity, you get the same income year after year. The problem is that $500 today won't have the same buying power 20 years from now. So your real income will drop.
Tip: You can protect your income from rising prices by buying an indexed annuity, but your initial payments will be a lot lower.
5. Getting your money if the annuity provider goes out of business
Assuris is a not-for-profit organization that protects Canadian insurance policyholders in the event their insurer goes out of business. You are automatically protected when you buy an insurance product from a member firm. Of course, the best protection is to pick a solid insurance company that will be around at least as long as you will.
Remember: A guaranteed income has some big advantages, but there are also some risks
If you're not sure an annuity is right for you, get expert advice. It's a big decision, and once you sign up, your money is locked in.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.