Should retirees in their early 70s partly annuitize? – MoneySense

One financial planner and blogger was ahead of the curve on rates and annuities. A year ago, on his Boomer & Echo blog, Robb Engen made the case for annuities just as interest rates were starting to rise. See “Using Annuities to Create Your own Personal Pension in Retirement.” 

“Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years. But with interest rates on the rise, annuities are certainly worth another look.”

Engen’s case for annuities revolves around how they minimize longevity risk: the fear many retirees have that they’ll outlive their money. He referenced Milevsky when he wrote: “It’s puzzling why more Canadians don’t choose to turn even a portion of their savings into an annuity—to pensionize their nest egg, to borrow a phrase coined by financial authors Moshe Milevsky and Alexandra Macqueen.”

Even a year ago, when he saw annuity quotes from RBC Insurance, Engen admitted that he “perked up when I saw the payout rates were between 5% and 7% of the initial deposit.” He included a table showing that a 65-year-old male investing $100,000 in an annuity would get an annual payment of $6,508, versus $7,310 at age 70, and a 65-year-old female would receive $5,411 annually versus $6,125 for a 70-year-old female.

However, a year later, I am surprised that annuity payouts don’t seem to have surged as much as you might think, given the interest rate increases of the past 12 months.

Fred Vettese says he has gotten “the same impression. I guess the insurance companies aren’t keen to commit to too high an interest rate over such a long term.”  Milevsky says annuity rates have increased in the last year but “remember that annuities are priced off the ‘long end’ of the yield curve, which hasn’t increased as much as the ‘short end.’ Even the Bank of Canada can’t control that…”

Birenbaum suggests, the lack of surge pricing “has to do with the other factors that drive pricing: mortality expectations vs. actual experience for the insured. There are few insurance companies offering annuities so limited competitive pressures.”

Prescribed annuities versus registered annuities

In my family’s case, Birenbaum suggests a non-registered prescribed annuity, which is far more (88% more!) tax-efficient than non-registered guaranteed investment certificates (GICs). 

Currently, each $100,000 of a prescribed annuity will yield $6,438 in annual income, with tax payable of only $750. Inside a RRIF, for a $100,000 deferred annuity with payments starting in January 2025, Birenbaum estimates monthly income would be $550.20 to $591.70, depending on the annuity provider. (Twenty-year guarantee and 100% continuance to the second spouse.) She also notes that Assuris (a nonprofit that protect policyholders of life insurance against insurance company failures) is raising the income guarantee on annuities from the current $2,000 per month to $5,000 per month.