Financial planner Jonathan Kestle of the Ian C. Moyer Insurance Agency in Ingersoll, Ont. sees annuities as a great way to strengthen the core of your retirement income strategy.

Talking to Save with SPP by phone, Kestle says he sees annuities as “one of our core planning philosophies.” He notes that while the Canada Pension Plan (CPP) and Old Age Security (OAS) may provide a “foundation for retirement,” people should look at their fixed expenses in retirement.

If CPP and OAS don’t cover off those month-to-month expenses like housing, heat, telephone, and utilities, then a good strategy would be to annuitize some of your personal savings to top that up.  CPP, OAS and an annuity will offer a “cash for life” core income amount that will cover off your basic expenses, he explains. Your other savings provide you with liquidity for “non-core” expenses.

Asked if an annuity offers any tax advantages over withdrawing money from a registered retirement income fund (RRIF), Kestle said not really, since both will have tax withheld at source. On the other hand, a non-registered annuity (an annuity purchased with non-registered funds) can offer significant tax advantages, since tax is set at a fixed rate over many years, he says.

The advantages of an annuity include the fact that “longevity risk,” or the fear of outliving your savings in retirement, is covered off, since an annuity is a “cash for life” product.

Put in perspective, Kestle explains that with a RRIF, you can arrange to have a set amount of money withdrawn each month, like an annuity. The difference is that with the RRIF, if investment returns don’t support the rate of withdrawal over time, you can run out of money while you are still alive. With an annuity, you can’t outlive your savings, he explains.

It’s important to realize, he says, that once you purchase an annuity, you lose control over that money in exchange for receiving guaranteed monthly payments. If you die at an early age, and don’t select an annuity that offers a survivor benefit, your “foregone” payments are used to help provide payments to other annuitants by the insurer via a “pooled risk” approach, he says.

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