Question from Lynne McLachlan, 60, Markham, Ont.: Could you explain the difference between a RRIF and an annuity? Also, could you touch on the pros and cons of a joint annuity vs. a single annuity?
Rona Birenbaum is a certified financial planner who founded Toronto-based Caring For Clients in 2000.
Simply put, an annuity is a type of investment. A RRIF, or registered retirement income fund, is a type of account.
Like a registered retirement savings plan (RRSP), a RRIF is a Canadian tax-deferred retirement plan. Investors use RRIFs to generate income from the savings they accumulated within their RRSP. You can hold a range of investments in a RRIF.
How does a RRIF differ from an RRSP?
Answer: Canada Revenue Agency-imposed annual withdrawal requirements. (Note that withdrawal rates are now based on a new formula that I outlined here in a recent post).
RRIF account holders must decide what type of investments to hold in their RRIF. Often, the investments in the RRSP are retained once the account is converted to a RRIF. That being said, strategic adjustments are appropriate, given the requirement to withdraw each year.
Income generation and account stability rise in importance. Annuities, offering guaranteed income, often play a role in the former.
An annuity is a promise by an insurance company. The promise is to make periodic payments (such as monthly, quarterly, annually) for the life of the investor.
Payment amount depends on two factors: investor’s age at purchase and size of investment. The older you are when you purchase the annuity, the larger the payment you will be offered for your investment, because the insurer can expect to pay for fewer years. Some experts suggest 70 is a minimum age to consider buying an annuity. This is particularly true for men, because male life expectancy is lower.
The primary advantages of annuities are simplicity, guaranteed income and a longevity guarantee (by definition, you can’t outlive the payments). As an intangible benefit, studies show that annuities tend to bring peace of mind.
Annuities vary. Their primary features include:
• Single vs. joint last-to-die – A single annuity provides income for the life of one person only. A joint annuity will provide income until both owners pass away. The payments can be level for the life of both owners, or can be set to decline on the death of one. Single annuities pay more per dollar unit of investment than joint annuities, as the expected number of years of payout is lower.
• Guarantee periods – An annuity with no guarantee period (such as, if the purchaser dies after only one income payment is received, no redress is offered; it’s one of the downsides of annuities) will pay the most. An income guarantee of 10, 15, 20 or more years will reduce the income of the annuity, but offer a guaranteed return of at least some of the original investment to your estate.
• Indexation – Annuities can be purchased with an annual inflation increase. Payments in the early years of the annuity are much lower than level, non-indexed annuities.
While annuities can clearly play a role in RRIF accounts, they should be only one part of your overall investment strategy. Since you lose access to the capital you used to buy the annuity, your other retirement savings should:
• Be in more liquid form.
• Include equity funds to help your portfolio keep up with inflation.