Annuities - have an advantage. The income you contract and buy from a life insurance company is guaranteed for your lifetime. In return, you give up the capital you used, to buy the guaranteed lifetime income. You also give up income flexibility during changing economic conditions. On the otherhand,
- It makes your life less complicated. Your annuity payments arrive like clockwork. Not fuss no muss.
- You know exactly month in, month out, the amount you are getting.
- It can continue for your life and if you wish for your spouse's life.
- A guaranteed minimum payments can be arranged, regardless of how long you live.
From a taxation viewpoint the income from a traditional annuity is like a mortgage in reverse. You give an insurance company $100,000 in cash they return this to you in the form of regular income payments, be it monthly, quarterly, or annually, your choice. These payments are a blend of interest earned on the $100,000, and principal, a portion of the $100,000. The composition of the payments in the early years, is more interest and less principal. Since, the interest portion attracts income tax, you get to keep less of your payment in the early years.
The advantages of Prescribed Annuity are:
With the consent of Canada Customs & Revenue Agency (CCRA) [we used to call them, among other unmentionable names Revenue Canada], a prescribed annuity is structured so that the amount of the tax liability is fixed level on the periodic income payment is fixed from the first to last payment. This means that the same portion of your periodic annuity cheque is paid as tax from the first payment to the last payment. A terrific tax planning tool.
Some of the disadvantages of a prescribed annuity are
- Interest rates play a huge role in setting the lifelong payment level of an annuity, Not surprizingly, a low intrest rate environment produces lower annuity payments.
- Annuity payments are struck at the time you buy it and never change (except if you opted for an inflation adjusted payment). So even if interest rates go up your payments don't change.
- You can not get lump sum cash out of your annuity for a car, trip or anything.
- Beyond the minimum guaranteed payments your capital is lost in the event of an early death.
There are techniques to improve the disadvantages. Give us a call.
Not only can we arrange for a prescribed annuity but we can shop the market for the best rate.