Another Look At Life Annuities (Part 2)

December 25, 2014

By Sheryl Smolkin

If you are considering purchasing a life annuity using funds in your registered (RRSP, RRIF, LIRA, RPP) or unregistered accounts (Savings Accounts, GIC, TFSA, etc) you will need to consider what features to select and how your decision will impact the level of benefits you receive.

For example, a life annuity may be:

• A single life annuity based only on the age of one annuitant.
• A joint and survivor annuity that pays a portion of the benefit (i.e. 60%) until the death of the surviving spouse.
• A single or joint and survivor annuity that guarantees payments for a specific period (i.e. 10 years).
• A deferred annuity that does not start paying monthly benefits in the same year the annuity is purchased.

Other more specialized annuities include term certain or fixed term annuities, guaranteed annuities with cash back features, impaired and child inheritance annuities. You can read about them here.

To give you an idea how the nature of an annuity can impact your monthly benefits, I got a series of quotes from the RetirementAdvisor.ca Standard Annuity Calculator on October 28, 2014 which I summarized in the table below. In all cases it is assumed that a lump sum of $100,000 was used to purchase an annuity and when invested by the insurance company, the lump sum earned 4%.

While these quotes assume the primary annuitant is female and the second annuitant is male, when a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

Table 1: Annuity Purchase quotes

	Single life	Joint	Single Life, COLA	Joint, COLA	Single, 10 yr, COLA
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	65	65	65	65
Gender of joint annuitant		M		M
Age when annuity purchased		65		65
Cost of living increases (COLA)			X	X	X
10 yr. guaranteed payments					X
% Payable to 2nd annuitant when 1st dies		60%		60%
MONTHLY BENEFIT	$637	$592	$522	$481	$503

	Joint, 10 yr, COLA	Single, 10 yr, COLA Age 71 start	Joint, 10 yr, COLA Age 71 start	Single, 10 yr, COLA Age 80 start	Joint, 10 yr, COLA Age 80 start
Gender of primary annuitant	F	F	F	F	F
Age purchased	65	65	65	65	65
Age payouts begin	65	71	71	80	80
Gender of joint annuitant	M		M		M
Age when annuity purchased	65		65		65
Cost of living increases (COLA)	X	X	X	X	X
10 yr. guaranteed payments	X	X	X	X	X
% Payable to 2nd annuitant when 1st dies	60%		60%		60%
MONTHLY BENEFIT	$473	$762	$719	$1,401	$1,355

Source: RetirementAdvisor.ca calculator as of October 28, 2014. Assumption: $100,000 lump sum purchase earns 4%.

It is apparent that the stripped down single life annuity pays a higher monthly amount ($637) than single or joint annuities with various combinations of guarantee periods and COLAs.

Benefit payments also increase significantly if the annuity payouts are deferred to age 71 ($762, single; $719, joint) even with a 10 year guarantee and COLAs. The payments are even higher payment if an annuity with the same features is deferred to age 80 ($1,401 single; $1,355 joint).

Furthermore, annuity payouts also vary as between insurance companies. For example, you can find current quotes from a series of insurance companies for single life annuities on a premium of $100,000 based on a guaranteed period of 5 years for both males and females on the Morningstar Canada website.

Receiving monthly annuity benefits in retirement can give you peace of mind. However, the monthly benefit you can purchase for any given lump sum varies considerable depending on the type of annuity you select, the age when you purchase the annuity, the age you begin collecting benefits and the interest rate assumptions.

Your financial advisor or an annuity broker can get quotes tailored to your situation that will help you to get the features you need for the best possible price.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

 

Annuities, Associate Professor of Finance, Canada Pension Plan, CPP, DC pension plan, Moshe Milevsky, OAS, Old Age Security, RetirementAdvisor.ca, RRSP, Schulich School of Business, SPP, York University

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