Low interest rates bode well for the economy at large, but for income-oriented investors, they could be a problem. Retirees are finding it increasingly difficult to fund their retirement needs with traditionally “safe” investments such as GICs and T-bills or other low-risk investments, simply because this income cannot keep up with inflation and taxes. Retirees need to find new ways to maximize their retirement income while keeping risk at a minimum. One solution worth considering is the insured annuity.
In a nutshell, an insured annuity is a combination of a prescribed life annuity (an annuity purchased with non-registered assets) and a life insurance policy. The annuity provides lifetime income with the added benefit of preferential tax treatment. Since prescribed annuities report level interest for the duration of the annuity, and because annuity income consists (in part) of a non-taxable return of your capital, annuitants receive enhanced after-tax income compared to other fixed-income investments such as GICs. The income generated from the annuity then pays for the other component of the insured annuity, the life insurance policy. The life insurance guarantees that your beneficiaries receive an amount equal to the original annuity investment. This means that you don’t have to worry about an annuity purchase eroding the size of your estate because your beneficiaries will receive the value of your estate through insurance proceeds.
Retirees choose insured annuities for four main reasons: a) they receive a greater after-tax income; b) an annuity may make the retiree eligible for increased government benefits; c) an annuity guarantees a lifetime income; d) an insured annuity leaves the retiree’s estate intact.
The income from insured annuities combine principal and interest payments, allowing annuitants to maximize their retirement income. This income is then spread equally over the life of the annuity, thus reducing taxes. Because annuitants enjoy reduced taxable income, retirees may also increase their government benefits, such as Old Age Security, Age Tax Credits, etc. Another feature retirees appreciate about insured annuities is that the annuity income can be eligible for the $2,000 pension income tax credit. Talk to your tax professional for details.
An insured annuity may not be the answer for everyone. Ideally, this fixed-income investment is suited for individuals or couples who: are insurable and between the ages of 65 to 85; are dissatisfied with current low interest rates; want to minimize investment risk while maximizing after-tax retirement income; seek to maximize government benefits and lower taxes; desire a guaranteed income for life; and want to leave a tax-free gift to their heirs.
Remember, an annuity is simply one solution to fulfill your estate planning needs. Your advisor can work with you to create a custom solution, and annuities can be a part of that plan.
Judy Poole is a financial advisor with Raymond James, and has spent the last 39 years involved in the financial industry. You can reach her at judy.poole@raymondjames.ca or see her website at www.raymondjames.ca/judypoole. This article is provided as a general source of information and should not be considered personal investment advice. The views expressed are those of the author and not necessarily those of Raymond James Ltd.
