Area of Law: Investments and Securities
Answer # 272
Annuities: RRSP maturity option for seniorsRegion: Ontario Answer # 272
If you are turning 71 and must wind up your RRSP, one of the choices you have is to purchase an annuity. An annuity is a fixed annual allowance provided by an investment. An annuity can provide a guaranteed regular income for the rest of your life or for a specified number of years. The amount of income provided through an annuity is generally determined at the time of purchase and depends on a number of factors, including the following 5:
- The amount of money deposited,
- The current interest rate,
- Your age,
- Your sex, and
- The number of years for which the company promises to make payments.
You decide how often you wish to receive payments, for example monthly or annually, and if you wish your payments to be indexed to help offset inflation. Although none of the RRSP proceeds will be taxed at maturity when you set up the annuity, the annuity payments themselves will be taxed as you receive them.
Pension income tax credit
Currently up to $2,000 per year of annuity income may be exempted through the pension income tax credit. The pension income tax credit is a federal tax credit available to taxpayers receiving eligible pension income. What is considered eligible pension income depends on your age.
If you are 65 or older, it includes:
- income from annuities
- income from RRSPs, and Deferred Profit Sharing Plans (DPSP)
- income from RRIFs
- interest from a prescribed non-registered annuity
- income from foreign pensions
- interest from a non-registered GIC offered by a life insurance company.
If you are younger than 65 for the entire year, pension income includes:
- income from a superannuation or pension plan
- annuity income arising from the death of your spouse under an RRSP, RRIF or DPSP.
The pension income tax credit may not be carried forward. Visit CRA for more information on the pension income tax credit.
Types of annuities
There are three general kinds of annuities:
- “term certain” for “fixed-term” annuities, payable to you or your estate for a fixed number of years;
- “single life” annuities, payable to you as long as you live; and
- “joint and survivor” annuities, payable as long as you or your spouse is alive.
If funded with RRSP money, legislation requires a “term certain” annuity to expire by the time you or your spouse reaches age 90. On the other hand, a “joint and survivor” annuity guarantees an income for the lifetimes of the annuitant and his or her spouse. This could be beyond the age of 90 in the case of one or even both spouses. This type of annuity can also have a minimum guaranteed payment period to provide a death benefit in the event that both annuitants die prematurely. A “single life” annuity with no minimum number of payments pays the highest amount of income but no death benefit.
The available options, and their effect on the monthly annuity payment, which you will receive, should be discussed with your life insurance licensed financial consultant. It is advisable to consider cash flow requirements, your general plan, and other related factors before making a decision. Prevailing interest rates must also be considered to determine whether annuities alone, or a combination of annuities and Registered Retirement Income Funds, might provide greater flexibility and returns.
You can obtain more information about what you must do with your RRSP when you reach the age of 71 from an accountant, a financial advisor, or from a tax lawyer.
More information is also available from Canada Revenue Agency.
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