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opinion

The best time to buy an annuity is always last year.

Annuity payouts are tied to interest rates, which have mostly fallen in recent decades. It’s an omnipresent hazard for people considering annuities to provide some of their retirement income – they can almost always look back and say they would have been better off buying a year ago.

But annuities have actually held up pretty well in this low-rate world we live in, at least when you compare them with guaranteed investment certificates.

Ivon Hughes, an annuity dealer with the Montreal-based Hughes Trustco Group, recently sent me a table of annuity quotes for January 2021, along with historical quotes going back to 2011. A 65-year-old woman looking for a $100,000 registered annuity would have been able to lock in payments as high as $553.87 in early 2011, according to the list of quotes from 10 insurance companies. Flash ahead to January 2021 and the best comparable quote is 21 per cent less at $436.73.

Now for a comparison with guaranteed investment certificates, courtesy of the historical interest charts provided by the online bank Tangerine. They show that a five-year GIC was available in January 2011 for 3 per cent, which compares with Tangerine’s mid-January 2021 rate of 1.1 per cent for five years.

Five-year GIC returns have been slashed by more than half, while annuity payouts have declined by roughly one-fifth. Annuities look even better when you look at what’s happened with bond yields. The Bank of Canada website shows five-year Government of Canada bonds had a yield around 2.6 per cent in mid-January 2011, compared with about 0.4 per cent now.

Thanks in part to competition between GIC issuers to attract money, rates on these safe investments have not fallen nearly as much as government bond yields. Annuities have held up better, a reflection of the fact that their returns are based on factors beyond rates. Part of annuity returns come from mortality credits, a term that refers to the component of annuity payments that come from people who bought annuities and died before they used up what they paid in.

As usual, one year ago was a better time to buy annuities than right now. The Hughes Trustco quotes show a woman aged 65 could have received as much as $457.87 in early 2020, about $21 more per month than is currently available.

But let’s give annuities their due – payouts have held up surprisingly well despite falling interest rates.

Click here for annuity and GIC rates.

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