Understanding Annuities In Canada: A Beginner's Guide To Retirement Income 2025

Understanding Annuities in Canada: A Beginner’s Guide to Retirement Income

Published on June 18, 2025 | By WealthFusions Finance Team

Understanding Annuities in Canada: A Detailed Guide

What Is an Annuity?

An annuity is a financial product sold by insurance companies that provides a guaranteed income stream, typically for retirement. You pay a lump sum or series of payments, and in return, the insurer pays you a fixed or variable income for a set period or for life.

Types of Annuities

Immediate Annuity: Payments start right after you make a lump-sum payment. Ideal for retirees seeking immediate income.
Deferred Annuity: Income payments begin at a future date, allowing your investment to grow tax-deferred during the accumulation phase.
Fixed Annuity: Provides a guaranteed fixed payment amount, offering stability and predictable income.
Variable Annuity: Payments vary based on investment performance; potential for higher returns but with risk.
Indexed Annuity: Returns linked to a market index (e.g., S&P/TSX Composite), offering some growth potential with downside protection.

How Annuities Work

You pay the insurer a lump sum or periodic premiums. The insurer invests the money and promises to pay you a regular income, either for a fixed term or for life. Payments may start immediately or be deferred to a later date.

The amount you receive depends on factors such as:

Amount invested
Type of annuity chosen
Age at purchase
Interest rates and market performance
Length of payout period or life expectancy

Advantages & Disadvantages of Annuities

Advantages: Guaranteed income, tax-deferred growth (for deferred annuities), protection against outliving savings, customizable options.
Disadvantages: Potentially lower returns than other investments, fees and surrender charges, less liquidity, inflation risk for fixed payments.

Who Should Consider Annuities?

Annuities suit retirees or pre-retirees seeking predictable income, risk-averse investors, and those wanting to hedge longevity risk (the risk of outliving your savings). They can complement other retirement income sources like CPP, OAS, and RRSP withdrawals.

Tax Treatment of Annuities

Payments from annuities are generally taxed as income. The portion that represents investment growth is taxable, while the return of principal is tax-free. Registered annuities (held inside RRSPs or RRIFs) have different tax rules.

💡 Tip: Before purchasing, compare annuity rates, fees, and terms. Speak with a financial advisor to ensure an annuity fits your retirement plan.

Retirement planning in Canada often focuses on RRSPs, TFSAs, and employer pensions—but there’s another powerful tool: annuities. These financial products convert your savings into a predictable stream of income for life or a set period. In this post, we explain what annuities are, who should consider them, how they compare with RRIFs and pensions, and what to watch out for when buying one. Whether you’re near retirement or planning early, this guide will help you make informed decisions for your financial future.

1. What Is an Annuity?

An annuity is a contract between you and an insurance company. In exchange for a lump-sum payment (e.g., $100,000), the insurer agrees to pay you a fixed income monthly, quarterly, or annually—either for a fixed term or for the rest of your life.

There are two main phases:

Accumulation phase: You invest money.
Payout phase: You receive income.

Most Canadians use annuities at retirement to guarantee lifetime income, especially after converting their RRSPs to RRIFs or cashing out savings.

2. Types of Annuities in Canada

Understanding different types helps match products to your needs:

Type	Description	Best For
Life Annuity	Income for life. Ends at death unless guaranteed.	Longevity protection
Term Certain Annuity	Guaranteed income for a fixed number of years (e.g. 10, 20).	Short-term income needs
Joint Life Annuity	Pays income for the lives of two people (e.g. spouses).	Couples wanting continued payments
Indexed Annuity	Payments rise annually to offset inflation.	Long-term inflation protection
Impaired Annuity	Higher payouts for those with health conditions.	Seniors with reduced life expectancy

3. How Much Income Can You Expect?

As of mid-2025, here are typical annuity rates for a 65-year-old Canadian investing $100,000:

Single Life Annuity (Male): ~$610/month for life
Single Life Annuity (Female): ~$580/month for life
Joint Life (50% to survivor): ~$530/month
10-Year Term Certain: ~$875/month for 10 years

Note: Rates vary by age, gender, province, health, and insurer. Use this annuity calculator to estimate your payout.

4. Pros and Cons of Annuities

Pros	Cons
Guaranteed income for life Zero market risk Simple and passive Can reduce Old Age Security (OAS) clawback risk	Less flexible than RRIFs No access to lump sums May lose principal on early death Inflation can erode fixed payments

Annuity vs RRIF: Which Is Right for You?

Feature	Annuity	RRIF (Registered Retirement Income Fund)
Definition	A contract with an insurer providing guaranteed income payments for life or a fixed term.	A government-registered account that converts your RRSP savings into a stream of retirement income with flexible withdrawals.
Income Payments	Fixed or variable payments, usually guaranteed for life or a set period.	Flexible withdrawals; minimum annual withdrawals mandated by CRA.
Control over Funds	Funds are generally locked in once annuity starts; limited liquidity.	You retain control and can adjust withdrawals and investments.
Risk	Low risk; insurer bears investment and longevity risk.	Investment and longevity risk remain with you.
Tax Treatment	Income payments are taxable as regular income.	Withdrawals are taxable as income in the year they are received.
Fees	May include insurance fees, surrender charges, and commissions.	Typically management fees for investments in the RRIF.
Flexibility	Less flexible; once purchased, difficult or expensive to alter.	Highly flexible; you can change investments and withdrawal amounts yearly (above minimum).
Inflation Protection	Usually fixed payments (some offer inflation adjustments at higher cost).	Investments can be adjusted to hedge inflation risk.
Ideal For	Those seeking guaranteed, stable lifetime income with low risk.	Those wanting flexible access and control over their retirement savings.

Summary

Annuities provide peace of mind with predictable income, shifting risk to the insurer, but limit access to your funds. RRIFs offer flexibility and control but require active management and come with market and longevity risk.

💡 Tip: Many retirees use a combination—investing some savings in annuities for guaranteed income, while keeping the rest in RRIFs for flexibility and growth potential. Consult a financial advisor to tailor the best strategy for your needs.

5. Annuity vs RRIF: Which One Fits You?

RRIFs and annuities both provide income from retirement savings, but differ in key ways:

Feature	Annuity	RRIF
Control Over Investments	Low – managed by insurer	High – you choose investments
Income Predictability	Guaranteed	Variable
Market Risk	None	Yes
Access to Capital	None	Flexible withdrawals

6. Taxation of Annuities

Tax rules depend on the funding source:

Registered Annuities (from RRSP, RRIF, etc.): 100% taxable as income.
Non-Registered Annuities: Only the interest portion is taxable via a prescribed or accrual method.

Tip: Use a RRIF for flexible withdrawals, then use a portion for annuity income stability.

Conclusion: Should You Buy an Annuity?

Annuities are best suited for Canadians who:

Worry about outliving their savings
Prefer guaranteed income without managing investments
Don’t have workplace pensions
Are healthy and expect to live beyond average life expectancy

To find the best annuity for your needs, book a free financial strategy call with our licensed advisors. We compare quotes across Canada’s top insurers.

Frequently Asked Questions

1. What happens if I die early?: If your annuity has a guarantee period, your beneficiaries receive the remaining payments. Without one, payments stop.
2. Can I buy an annuity with TFSA funds?: Yes, but income remains tax-free if the annuity is TFSA-funded. Few providers offer this.
3. Are annuity payments indexed for inflation?: Only if you buy an indexed annuity, which pays less initially but increases annually (e.g., 2%).
4. Is there a minimum or maximum purchase amount?: Minimum is usually $10,000–$25,000. No hard maximum, but higher purchases require medical review or age limits.
5. Can I cancel an annuity?: Generally no, unless within a 10-day rescission window or if you buy a special “cashable” annuity with lower returns.
6. What are prescribed annuities?: Tax-friendly annuities from non-registered funds that level out taxes over time, reducing upfront tax hit.
7. Can I combine an annuity with a RRIF?: Yes. Many Canadians use a hybrid strategy for both flexibility (RRIF) and income stability (annuity).
8. Where can I compare annuity quotes?: Contact an independent insurance advisor or use comparison tools like Cannex or consult WealthFusions experts for help.