Using annuities to fund retirement income
My name is Stuart Kirk and I am a partner at Hicks Financial Inc.
As you probably have read in this column last week, Grant Hicks has handed me the torch and the responsibility of writing this column in the future. I would firstly like to thank Grant and all those before him for consistently producing a high quality educational financial column.
I am honoured to be taking over the Where it Counts reins from Grant and I will certainly endeavour to continue the fine tradition of educating the readers in our community regarding financial affairs.
I would like to briefly discuss how annuities can be used to fund retirement income. Let me start by defining what an annuity is: In exchange for a single lump sum deposit, an insurance company makes guaranteed regular income payments to you that contain both interest and a return of principal. Payments can be for a period of time or for the lifetime of one or two people.
Depending on your situation there are different types of annuities that can be used.
Life Annuities will provide you with guaranteed regular income for life. They can be purchased as a single life, based on one person’s life, or as a joint and survivor, based on the lives of two people.
Life Annuities can be purchased with or without a guarantee period. Life Annuities are used when you want the highest guaranteed income amount possible from your investment.
Term Certain Annuities will provide you with guaranteed, regular income for a selected period of time.
Once this period is over, income payments cease and the annuity contract ends. Term Certain Annuities are used when you want the highest guaranteed income amount possible from your investment and you would like the income to last to a specific point in time.
For example: You need income until pension and government benefits become available.
Prescribed Annuities offer potential preferential tax treatment if you are investing using non-registered funds.
Each payment includes the same amount of interest and capital. This evens out the amount subject to tax and provides some tax deferral. In addition, for those aged 65 or older, income from annuity will qualify for the pension income tax credit and for pension income splitting.
You might be wondering how insurance companies determine the income to be paid to you from an annuity; here are the factors:
• The amount of money you deposit
• Current interest rates
• If you want your payment amount indexed (to increase over time)
• Sex and age
• The amount of income you want to guarantee (if you elect this option)
In general, choosing a longer guarantee period will decrease the amount of income produced. Longer guarantee periods require more funds to be set aside by the insurance company to provide for the additional guaranteed payments.
For Term Certain Annuities, payments will continue until the end of the term. If you die before that, the annuity payments will continue to your estate or designated beneficiary until the end of the term.
Remember to consult your financial advisor before taking any action.
Written by Stuart Kirk, CIM. Stuart Kirk is a Retirement Planning Specialist with Hicks Financial Inc. The opinions expressed are those of the author and may not necessarily reflect those of Hicks Financial Inc (www.ghicks.com).