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Annuities: Busting the myths

Sometimes overlooked by investors because of myths and misconceptions, annuities can be a reliable means to provide guaranteed income in retirement

By: Gail Johnson

Date: December 15, 2016

Most Canadian investors would welcome the idea of a guaranteed, comfortable retirement. The problem for many investors, though, is that they are unsure how to make that happen.

According to a 2015 study by financial data hub CANNEX and market research firm Greenwald & Associates, 80 per cent of Canadians want more lifetime guaranteed income (LGI) than what they’ll receive from government benefits.

But while annuities can be a reliable means of securing steady cash flow during retirement, myths and misconceptions often prevent people from incorporating them into their overall financial plan, says Patricia Michon.

“Annuities are often overlooked because many investors simply don’t know they exist,” says Ms. Michon, assistant vice-president of guaranteed wealth product management at Sun Life Financial.

“They’ve been focusing on saving and accumulating assets for many years using investments such as mutual funds. It isn’t until later in life that they start to think about how they’ll best turn those savings into income.”

Simply put, annuities allow clients to receive a stream of guaranteed income in exchange for a lump-sum premium. Regardless of how long they live, an annuity offers people guaranteed income for life, significantly reducing the risk of outliving savings.

“Annuities can provide protection from equity market and interest rate volatility, offer a tax-efficient vehicle for non-registered funds, and give clients a simple investment, with no ongoing investment decisions,” explains Ms. Michon.

Despite their benefits, however, the upfront premium may cause some clients to hesitate – and may require a mindset shift.

“For most people, having some money in an annuity is a good idea at retirement because you need to be able to know with relative certainty you’re going to get a ‘pay cheque’ for the rest of your life, no matter how long it is,” says Lowell Aronoff, CEO of CANNEX Financial Exchanges Ltd.

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