Annuities, RRIFs and RRSPs: a comparison

Life expectancy in B.C. is now around 81 years for men and 85 for women.

At age 65, however, life expectancy for men has become 20 years (so if a man reaches age 65, chances are he will reach age 85), while for women it has become about 22 years (so a woman aged 65 can expect to live to 87).

These statistics are important for people who, at age 71, have to decide what to do with their RRSPs. At that point, they need to decide whether to move into an RRIF or something else, such as just cashing it all in (and paying a large tax bill).

Whoever your advisor is, when you reach 71, consider buying an Annuity.

Recently in the Globe and Mail, Mr. Ian McGugan wrote a sage article about this issue, comparing Annuities with RRIFs.

With an RRIF, you convert from an RRSP tax-free. You have minimum annual withdrawals, and whatever you withdraw is taxed as income. As you withdraw over the years, of course, the value of the RRIF drops. At death, the remaining balance falls into your Estate, and is all added to your (taxable) income in the year you die.

With an Annuity, again, you convert from an RRSP tax-free. The Annuity will pay you a certain amount annually, based on factors such as the amount put into the Annuity, life expectancy and so on. You will receive a set amount every year, which is taxed as income.

There are different types of annuities. Some are guaranteed for a certain number of years, so if you live past that number, you still receive the same annual amount. The longer you live, the more favourable an annuity is over an RRIF. In several instances, the amount collected under an Annuity exceeds that collected under an RRIF.

Take a close look at Annuities. It may enhance your financial retirement.

This ad ran in the Richmond Review on July 25, 2014.