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Well, Annuities never really left but in the current higher interest rate environment Annuities do look more attractive than they have for several years.

A life annuity is an insurance contract where individuals may make an investment in a future income stream.  Think of it like buying your own defined benefit pension plan OR like a reverse life insurance policy.  You make a lump sum investment up front, and the insurer pays monthly income to you for the rest of your life, guaranteed.

Annuities can be purchased with funds from your bank or your portfolio (including non-registered investments, RRSP, RRIF or Locked-in funds).  The source of funds will determine the taxation of the income stream that you receive.  Annuities purchased with non-registered funds are very tax efficient and a great tool to integrate with other forms of retirement income that may be subject to income tax ( eg. pensions, RRIF withdrawals, CPP etc.).

There’s lots of different structures but generally most annuities fall into either a single life or joint life structure.

There are many important criteria that are part of the math on calculating annuity rates but three of the main criteria are:

• Age
• Gender
• Long-term interest rates

Rates would be slightly lower if purchased on a joint basis as insurers would be paying a longer income stream on two lives vs. one – but this can be a great structure to provide more security on the income stream between spouses.

There are pros and cons to the strategy.  Guaranteed income for life is nice piece of mind for a portion of investments with no risk of outliving capital.  However, annuity contracts are one-way.  Once a policy has been placed there’s no changing your mind.  Inflation can erode income amounts over time, but inflation protection is an option when purchasing annuities to manage this potential risk.

Also important is there’s no estate value for an annuity.  Once annuitant’s pass away, income stops.  Other common Pros and Cons are listed below.

For these reasons, we generally recommend considering a portion of overall assets be considered for an annuity.  How much really depends on your personal situation but a rule of thumb to quantify our maximum recommendation would be  considering 25-35% of assets.  This would ensure ample liquidity is available if needed.

The good news is that with higher interest rates, annuity payouts have also improved over the past few years.  Cannex, an independent resource providing transparent pricing and analytic information on annuity products also maintains statistics on annuity pricing trends.   The chart below shows that rates have been steadily climbing from Pandemic lows and recovering to levels not seen in almost a decade.

*Source:  Cannex.com

For guaranteed income products, these rates are becoming quite attractive. More details on current rates can be found here.

So, rates have gone up and we are all a year older this year so annuities do look better than they have in years but annuities are not only for older individuals.  These may make sense for some as you transition out of work into early retirement too.

Let’s have a conversation and review if a life annuity would make sense for you or a family member now.  We can run a quick quote to give real numbers for your personal situation.

Contact us anytime to start a conversation.

In our next newsletter, we’ll  review how can investment in annuities and life insurance can be combined together for a powerful, estate friendly income strategy with guaranteed return of capital.

Resources:

Annuity Basics –  Scotia Wealth – Life Annuity – an income solution for Life

If we rolled the clock back 12-months, we would be re-living the extremely difficult market environment that persisted for most of 2022.   So far this year while we’re pleased to see more stability in our portfolios, we remain cautious.    Many of the 2022 problems have carried into mid-2023 with no clarity on recession timing or severity. Some economists have now pushed out the recession expectation to sometime in 2024.  Interest rates also remain elevated and stubborn inflation is persisting in Canada and the US.

Strength in the labour markets and related increased wage growth have allowed many North Americans to absorb higher inflation and continue to pay higher prices for goods.  This higher rate of consumer spending has left policy makers with the hard decision to increase interest rates again over the summer this year.  As expected, the Bank of Canada (BoC) increased the overnight rate slightly in July to 5.0% (from 4.75%).  We expect this rate to hold here through the remainder of 2023 and into the first half of 2024 or until the economy and inflation cool to more comfortable levels supporting rate cuts.  That said, the BoC did leave the window open for further increases if needed.

However, in stark contrast to 2022 it’s been nice to see positive returns from almost all asset classes so far this year.  The equity and bond markets globally have shown signs of recovery.  While positive on so far in 2023, The TSX (+5.70%) has underperformed vs. the S&P 500 Index in the US (+17.5%).  US and Global indexes have delivered stronger results YTD.  MSCI World Index C$ (+12.73%).  The tech-heavy Nasdaq index has screamed back this year (+36.1%) but is still below where it started the year in 2022 – growth stocks were beaten down heavily last year.

Bond markets have had a much better start to the year compared to 2022 and should continue to deliver solid risk-adjusted returns in the fixed income sleeve of the portfolio in the second half of the year.  GICs also provide better returns and security in this higher rate environment attractive risk-free rates available.

That there remains uncertainty is good news for investors – creating disconnections in stock prices and investment opportunities.  Stock markets are no longer moving in one-direction fueled by companies borrowing at near zero percent to grow.  Fundamental research will increasingly remain important when looking for opportunities.  Interest rate hiking appears to be nearing the end of its cycle too as the direction of inflation begins to flatten.

For the second half of 2023, we expect continued volatility until negative news declines but do believe  our full-year investment expectations are playing out reasonably well this year.  Stock selection will also remain an important aspect of portfolio performance.  When paired together, we expect both active and passive strategies will continue to reward investors providing growth  and cost efficiencies to portfolios this year.

For more, please review the latest outlook report from our Global Portfolio Advisory Group.

We have also included  the 2023 Mid-Year Outlook from Capital Group for more perspective on what to expect for the second half of the year.

As always, please contact our team if you would like to discuss your portfolio and financial plans.