Add annuities to the list of safe investments that have been revitalized by high interest rates.
Insurance adviser Rino Racanelli said his annuity sales are 50 per cent higher than they were 18 months ago, before rates started climbing. Financial planner Rona Birenbaum says she’s placing more money in annuities now than in the past, and she’s recommending annuities more often.
Rising rates have driven up returns on savings accounts, guaranteed investment certificates, treasury bills, as well as annuities. But annuities have a few other things going for them right now.
If you’re part of the wave of retiring baby boomers, they offer maintenance-free income that won’t demand your attention as you age. Annuities also offer refuge from the never-ending drama of stocks, bonds and everything else financial. Another benefit is the recent upgrade in the protection offered in case an insurance company selling annuities fails.
Annuities are insurance contracts where the buyer exchanges a lump sum of money – as little as $25,000 or $50,000 – for a preset, guaranteed, lifelong stream of monthly income. According to Mr. Racanelli, a 65-year-old woman who bought a $100,000 non-registered annuity could receive as much as $6,386 per year, up 5.9 per cent from $6,032 12 months ago.
The more dramatic comparison is with July, 2019 – the best annual payout today is close to 20 per cent higher than the $5,328 payout back then. These quotes are for an annuity where payments are guaranteed for 10 years – if you die before that, a beneficiary gets the money for the remaining length of the guarantee period.
Recognizing that rising rates help increase payouts, some people have been trying to time the right moment to buy an annuity. Buy now and you can lock in the best payouts in years, said Naunidh Singh Hunjan of Hunjan Financial Group Inc. in Mississauga.
“This is a really special time when it comes to annuity rates,” said Mr. Hunjan, a chartered life underwriter (CLU).
Annuities offer money for life in the same way as a company pension, the Canada Pension Plan and Old Age Security. But while CPP, OAS and some company pensions provide inflation protection, annuities only offer this feature if you accept significantly lower payouts. Another drawback is that you can’t cancel an annuity midstream and get what’s left of your investment back.
For these reasons, annuities should be considered only for a portion of your retirement savings. Mr. Racanelli said his 65-year-old clients are typically putting 25 to 30 per cent of their savings in annuities, with older clients going as high as 50 per cent. Investments that are complementary to annuities include dividend growth stocks, which offset inflation with rising cash payouts to shareholders.
Annuities are typically assessed in purely financial terms, but Ms. Birenbaum said they also have a “protective” benefit for seniors. In an e-mail, she provided some examples:
- Pressure to give money to family members: Annuities are for generating income and are locked in.
- Financial industry sales tactics: Annuities are a one-and-done financial decision.
- Overspending: Annuity income is predictable, but finite.
- Cognitive decline: Annuity income is the definition of an autopilot investment.
Mr. Racanelli also highlighted the benefits of annuities for people concerned about how cognitive decline would affect their ability to manage retirement savings. “If people have an annuity, they know that money is coming in every month,” he said.
Annuities insulate you from financial market ups and downs, which cuts two ways. You miss out when stocks soar, but also when stocks plunge. As for the risk that the insurance company offering your annuity goes under, there’s good news in some improvements announced recently by the insurance industry organization that protect policyholders against insolvencies.
Assuris now guarantees monthly annuity payments up to $5,000 monthly or 90 per cent of your promised monthly income benefit, whichever is greater. That’s up from $2,000 or 85 per cent.
While annuity payouts have increased in recent years, there’s still a variation in the payouts offered by insurers. Mr. Racanelli looked at seven annuity providers late in July and found that the annual benefits for a 65-year-old male buying a $100,000 registered annuity ranged from $6,801.33 at the high end to $6,579,64 at the low end.
If you want retirement income and are considering annuities, two other products to look at are the Purpose Longevity Pension Fund and the Vanguard Retirement Income ETF Portfolio (VRIF-T). Both are designed to provide reliable retirement income, though not with the guarantees of an annuity.
One more drawback with annuities is how hard it is to find comparative quotes. Some annuity sellers make them available, but you have to provide personal information. Cannex offers a quickie overview of annuity rates at cannex.com.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
Ready to think about your (eventual) financial freedom?
Introducing Retire Rich Roadmap, a 5-part newsletter course to set you up with the tools you need to think about retirement, whether that's happening now or in a few decades. Sign up now – each lesson will land in your inbox on Thursday.