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Financial planner Robb Engen recently tackled this puzzle in his Boomer & Echo blog, “Why Canadians avoid one of retirement’s most misunderstood tools.” Engen notes that experts like Finance professor Moshe Milevsky and retired actuary Fred Vettese believe “converting a portion of your savings into guaranteed lifetime income is one of the smartest and most efficient ways to reduce retirement risk.” Vettese has said the math behind an annuity is “pretty compelling,” especially for those without Defined Benefit pensions.
Milevsky and Alexandra Macqueen coined a great term applicable to annuities when they titled their book about the subject Pensionize Your Nest Egg, which I reviewed in the Financial Post in 2010 under the title ”A cure for pension envy?”
Engen observes that a life annuity is “the cleanest version of longevity insurance … You hand over a lump sum to an insurer, and they guarantee you monthly income for life. If you live to 100, the insurer pays you. If stock markets collapse, you still get paid. If you’re 87 and never want to look at a portfolio again, the income keeps flowing.”
In other words, annuities neutralize the two big risks that haunt retirees: longevity risk (the chance of outliving your money) and sequence-of-returns risk, the danger of suffering a stock-market meltdown early in retirement and inflicting irreversible damage on a portfolio.
Despite all the seeming positives about annuities, Engen notes that “almost nobody buys one.” He cites a Vettese estimate that only about 5% of those who could buy an annuity actually do so. Engen suggests there is a behavioural hurdle: fear of losing liquidity and control of the underlying assets. He cites research by the National Institute of Ageing’s Bonnie-Jeanne MacDonald on pooled-risk retirement income, where she wrote that such retirees are “strongly opposed to voluntary annuities, as they want to keep control over their savings.”
Even so, the new Retirement Club created by former Tangerine advisor Dale Roberts earlier this year (see the blog posted on my own site in June) recently featured a guest speaker who extolled the virtues of annuities: Phil Barker of online annuities firm Life Annuities.com Inc.
Barker said many clients tell him they’ve done really well in the markets over the last 20 years and now they’d like to lock in some of those gains. They may be looking for fixed-income strategies, and many were delighted with GIC returns when they were a bit higher than they are now (some in the range of 6-7%). But they are less happy with the new rates on GICs now reaching maturity. Meanwhile, annuities have just come off a 20-year high in November 2023 so the time to consider one has never been better, Barker told the Club in August.
With annuities, you can lock in a rate for the rest of your life—so if your timing is good, it may make sense to allocate some funds to them.
Related reading: GICs vs. annuities
Barker said eight life insurance companies offer annuities in Canada: Desjardins, RBC Life Insurance, BMO Life Insurance, Canada Life, Manulife, Sun Life, Equitable Life and Empire Life. All are covered under Assuris, a third-party organization that guarantees 100% of an annuity up to $5,000 per month. So if one of those companies failed, the annuity would be honored by one of the other firms via Assuris.
Barker described an annuity as simply a “personal-funded pension.” To set one up you can take registered or non-registered funds and send the capital to an insurance company. In return, they give you an income stream for as long as you live: this is the traditional life annuity. Unlike annuities in the U.S., you cannot add funds to an existing annuity, Barker told the club, nor can you co-mingle funds from for example RRSPs and non-registered funds.
However, you can buy a new annuity each time you need to. There is no medical underwriting for annuities, unlike life insurance. Joint annuities for couples are a great value, he said, but the tax slips are sent to the primary annuitant. Nor is income splitting possible under current CRA rules.
Annuities shine when you are confident about your health and prospects for living a long time. Having $X,000 a month assured income to live on means your other sources of income that fluctuate with stock markets can be weathered, Barker said. “We’re seeing people getting 6.5% to 8.5% a year for the rest of their lives, depending on their age.”
As Dale Roberts commented during Barker’s talk, having enough to live on just from the pension bucket (annuities, pensions, CPP/OAS etc.) frees you up to take some risk in other areas, like stocks and equity ETFs.
Registered funds transfer to an annuity tax-free; that’s because money is not being deregistered, but rather going from one registered environment into another registered environment. It will be fully taxed when it comes out. The monthly income from the annuity is then fully taxable in the year it is received.
If you fund with non-registered money, the taxation is considerably different. For one, if your non-registered account has unrealized capital gains you’ll have to realize them and pay tax on them. Other than that, so-called prescribed annuities are relatively tax-efficient. The capital that is used to fund the annuity is not taxed, only the gain is, Barker says. “Therefore, the taxable portion of the annuity income is a very small amount. Prescribed means that the taxation is the same or level for the entire life of the annuity.”
The Club has also covered other retirement income products that may resemble annuities in some respects: the Vanguard Retirement Income Fund (VRIF) and the Purpose Longevity Fund, both of which I have small chunks in. Dale adds that the Longevity Fund has the potential to be a “nice complement to annuities,” as it “is designed to increase payments quite nicely in the later years thanks to the mortality credits. Those with very long lives are subsidized by those who pass away much earlier.”
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Jonathan Chevreau
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Jason Kelce is doing what big brothers do best — giving advice to his little bro.
We’ve all seen Travis Kelce‘s season with the Kansas City Chiefs this year unfortunately go downhill. They started off really rocky, and ended with a historically bad outcome. They didn’t make it to the playoffs for the first time in over a decade. On top of that, their star quarterback Patrick Mahomes got a season-ending ACL injury. It’s just been one hit after another.
Of course, rumors have been swirling for a while this may be KillaTrav’s last season in the NFL. We mean, he’s got a lot of new ventures ahead of him! His wedding to Taylor Swift, his pivot into the entertainment industry with his appearances in things like Happy Gilmore 2 and Grotesquerie… There’s no doubt he’s got something good up ahead in life! But before he makes the big decision to leave behind football forever, Jason has a word of advice.
Related: Travis All In His Feels While Addressing Chiefs’ Devastating Loss To Texans
During an appearance on Monday Night Football this week, he was asked about his little brother’s possible retirement, to which the former Philadelphia Eagles player said:
“I’m curious [as to how Travis will approach this], too. In my opinion, to nail that decision, you have to step away from the game for a little bit. Play these last three games, enjoy them with your teammates, enjoy them with your coach. The team’s gonna be different whether you come back or not next year, so enjoy these three games.”
Smart! Stay in the present, don’t spend all your time focusing on the future. Jason continued:
“Let it sink in. It’ll come to you in time. There’s so many emotions with this game, especially after a season that went the way this one went. It’s been so up and down … Right now, it’s just too fresh. You gotta step away from it. You gotta think about it. And then, it’ll come to you.”
See the clip (below):
.@JasonKelce on whether Travis Kelce is weighing retirement at the end of the season.
“To nail that decision you gotta step away from the game for a little bit … It’s too fresh.” pic.twitter.com/XNcCPIYcZO
— SportsCenter (@SportsCenter) December 15, 2025
That’s some solid advice! And who better to take it from than your own brother, who also went through this very thing not too long ago?
We wish Travis luck on this big decision, we’re sure he’ll make the best one for himself and his future. Thoughts, Perezcious readers?
[Image via MEGA/WENN]
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Perez Hilton
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Having said that, this tax credit is not a big deal for most people, and in some cases, you will be better off not converting an RRSP or LIRA to a RRIF or LIF to qualify for the credit.
In 2025, the maximum federal tax savings is $290 (for my calculations, read on). There is a little more in savings when you apply the provincial credit, which varies by province. In Ontario, the additional tax saving is $89. That means the total tax savings for everyone in Ontario is $379, assuming they are paying at least $379 in tax. If you can’t use the full credit, you can transfer what you can’t use to your spouse.
As a reader, Sylvain, you may have read that the maximum federal tax savings is $300 and not the $290 stated above. That was true in previous years, but the lowest federal tax rate was reduced this year from 15% to 14%. The rate didn’t come into effect until the end of June, or halfway through the year. Therefore, for 2025 the lowest federal tax rate and pension tax credit is 14.5%. Next year they will both be 14%.
The other thing to keep in mind is that claiming the $2,000 pension tax credit is not a way to get $2,000 out of your RRIF/LIF tax-free, something I often hear. Well, okay, it almost is if you are in the lowest tax bracket.
Think about the way the tax credit works. For the federal $2,000 tax credit, a rate of 14.5% is applied and the tax savings is $2,000 x 14.5% = $290. A rate of 5.05% is applied to the $1,762 Ontario credit for a tax savings of $1,762 x 5.05% = $89. The two combined come to a tax savings of $379.
Now think about what happens when you draw $2,000 from a RRIF or LIF. If you are in the lowest tax bracket in Ontario, with a marginal tax rate of 19.55% (14.5% federal + 5.05% provincial), you will pay $2,000 x 19.55% = $391 in tax. When you apply the pension tax credit savings of $379, you end up paying only $12 in tax on the $2,000 withdrawal. If the Ontario pension tax credit was $2,000 rather than $1,762 then it would have been a wash with no tax owing.
The story is different for a person in the highest tax bracket with a marginal tax rate of 53.53%. A $2,000 RRIF or LIF withdrawal will result in $1,070 in tax before applying the credit, and $681 in tax after the pension tax savings of $379. A person with an income of about $100,000 will pay about $240 in tax after the credit is applied.
This leads to the next question for the person who is only drawing the $2,000 to get the pension tax credit. Does it make sense to draw the money and reinvest the lesser after-tax amount, or would it be better to leave the full $2,000 in the RRIF or LIF to grow? This becomes a planning question. What are your spending and gifting plans?
Have I pelted you with enough math, Sylvain? You are right to think about ways to minimize the tax you owe and there are times when you can claim the pension tax credit before the year you turn 65.
The most familiar way you can claim the pension tax credit before age 65 is when you are receiving income from life annuities from superannuation or employer pension plans. You can also claim the credit if you are under age 65 and are receiving pension payments as the result of the death of a spouse who was eligible for the pension tax credit. In other words, if your spouse is over age 65 and drawing from a RRIF and then dies, you can claim the pension tax credit on that continued income even if you are not yet 65.
Another advantage of the pension tax credit comes with the ability to split pension income. If you have a defined-benefit pension plan you can split your pension income with your spouse before age 65. In this case both of you can claim the pension tax credit, even if you are both under 65. The same is true with RRIF or LIF income after age 65, assuming you are both 65 or older. Instead of claiming a $2,000 pension tax credit, the two of you can each claim the $2,000 credit. Two credits for one pension!
Thanks for your question, Sylvain. Some people automatically convert RRSPs or LIRAs to RRIFs or LIFs to qualify for the pension tax credit without really thinking about it.
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Allan Norman, MSc, CFP, CIM
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