Pensioner’s who depend on their savings for their retirement income are looking for higher returns than traditional GIC’s and bonds, while reducing their annual taxable income. A prescribed annuity can provide both and the guarantee that you cannot outlive your savings.
An annuity contract must qualify for prescribed tax treatment and is defined in Regulation 304(1) of the Income Tax Act. It can be exempt of accrual taxation if the following conditions are met:
Annuities are among the safest investments around because they are financially backed by Canada’s insurance companies, which in turn are backed by an organization called Assuris (www.assuris.ca). Assuris is the not for profit organization that protects Canadian policyholders in the event that their member life insurance company should fail.
Assuris' has a monthly income protection for annuities. If your life insurance company fails, your payout annuity policy will be transferred to a solvent company. On transfer, Assuris guarantees that you will retain up to $5,000 per month or 90% of the promised monthly income benefit, whichever is higher. Assuris is funded by the life insurance industry and endorsed by the Canadian government.
With this strategy you give up liquidity and some flexibility, therefore it should be an important component of a larger investment plan. Depending on your age and net worth, 25% to 35% of your assets can be allocated using this strategy. You should always have enough cash on hand for emergencies and other opportunities.
The annuity is permanent. You are giving up a lump sum of cash for a guaranteed income stream. Once it is implemented it cannot be changed. The annuity is not liquid. No access to your funds other than the income stream.
Investing in GIC’s creates interest income. Interest income is taxed at the highest rate compared to dividend or capital gains income.
Anywhere from ages 55 to 85 and some instances beyond.
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You have been taxed your whole life, why pay taxes upon death? It is said that your biggest tax bill will be your final tax return. By purchasing a prescribed annuity, the income ends on death and all your assets in the annuity equal zero. That means zero assets for Revenue Canada to tax you on your final tax return. If you want to leave money to your loved ones, then life insurance is the best vehicle for that purpose. The death benefit goes directly to your beneficiary tax free. If you’re looking to die broke and leave your loved ones a large chunk of your hard earned assets, then this strategy is right for you.
Commission structure, especially trailer fees could be the reason. They would rather sell you an investment such as a mutual funds which means bigger up front and trailer fee commissions attached. The more money you hold in an investment fund the higher the trailer commissions for your bank or investment advisor. Regardless if your investment makes or loses money, your bank and investment advisor continue to cash in on the trailer fees. Annuities pay a one-time commission with no trailer fees for the agent who sold you the annuity.
Interest rates have been low in Canada since the early 1990’s. Interest rates partially affect annuity prices. Each insurer calculates their own annuity rates using the following criteria:
An annuity can be purchased with an inflation protection index.
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