An annuity provides a series of payments to the annuitant in exchange for a lump sum.

  • e.g., monthly, quarterly, annually
  • payout is a combination of return of capital (tax-free) and interest (taxable)
  • can be used to provide guaranteed lifetime income (e.g., retirement income)
  • available in
    • RRSP: all income is taxable (no tax-free return of capital)
    • nonregistered: only the interest portion is taxable

An annuity can be prescribed or nonprescribed.

The annuitant must be an individual (not a trust, corporation, etc).

Annuities offer creditor protection

Advantages of Annuities

  • security
  • guaranteed returns
  • interest income

How Annuities Work

Questions about annuities

  • when do benefits start?
  • are benefit guaranteed?
  • are withdrawals or surrender permitted?
  • is inflation protection available?
  • what is the benefit period?
  • how many lives are covered?

Benefit Timing

  • immediate annuity
    • the first paid out is made at the end of the first annuity period after purchase
  • deferred annuity
    • benefits do not start for at least one year
      • once payments begin, called a "payout annuity"
    • nonprescribed
    • creditor protection
      • simply name a beneficiary (no preferred class required)
      • for all cases where the beneficiary is revocable
      • can waive creditor protection by pledging the annuity contract as loan collateral

Benefit Guarantees

  • fixed benefit
    • guaranteed by the insurer
    • based on interest rates at the time of purchase
    • each benefit payment is the same amount
  • variable benefit (through a variable annuity)
    • nonguaranteed (each payment can vary) → investment risk
    • premium buys units in an investment fund (like a segregated fund?)
    • each benefit payment is the same number of units, but unit value fluctuates → benefit fluctuates

Inflation Protection

  • indexed annuity
    • payment increases (e.g., with the consumer price index) → hedge against inflation
    • if purchased with registered funds, indexing cannot exceed 4% by law


Immediate Annuity

  • commutable
    • can cancel before contract maturity date and received the present value of the unpaid benefit payments as a lump sum
  • non-commutable
    • no early payout possible

Deferred Annuity

  • during the accumulation period
    • renews periodically (like a GIC)
    • investment growth is taxes (like a GIC)
    • early withdrawals allowed
      • often charge a backend load as a declining percentage of the withdrawal
  • at maturity

Market Value Adjustment

A market value adjustment usually applies to withdrawals. Three forms are common.

  1. credit the interest rate that would've applied for the term of the annuity
  2. apply the change in interest rates from the date of deposit to the date of withdrawal
  3. as above plus an additional penalty

Surrender charges may also apply (e.g., based on the years remaining to maturity).

Types of Annuities

There are three types of annuities:

  1. Term Certain Annuities
  2. life annuities
  3. structured settlements


Annuities are taxed on an accrual basis: as income is earned even if not received (e.g., deferred annuity)

Taxation depends on the type of annuity.


  • owner = annuitant
  • payments start by the end of the calendar year of purchase
  • guarantee ends by the annuitant’s 91st birthday
  • level annuity payments (except for the reduction in payments to a survivor with joint & last survivor)

Creditor Protection [redundant?]

  • with a named beneficiary, any proceeds on the death of the annuitant are paid to the beneficiary, bypassing the annuitant’s estate and avoiding probate
  • if the named beneficiary is in the preferred class (parent, spouse, child, grandchild), assets are also protected from annuitant’s creditors while annuitant is alive

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