An annuity is an investment that you make, either in a single lump sum or through instalments paid over a certain number of years. Generally the income starts one month after the deposit if it is to be paid monthly, or one year after the deposit if it is to be paid annually. An annuity does not provide any life insurance cover but, instead, offers the annuitant guaranteed income throughout his life or for a specific time period.

The payments from a life annuity are a blend of interest and capital and are usually a level payment, although they can be indexed annually to a maximum of 4% per year. Each time a payment is made, the amount of capital remaining in the annuity is reduced thereby reducing the capital based on which future interest can be earned.

Types of annuities

Non-registered annuities may be purchased as a prescribed annuity or as a non-prescribed annuity. The two types of annuities differ in their tax treatment.

Prescribed Annuity
A prescribed annuity provides for a level tax treatment so the same amount of taxable income is reported each year of the contract.

Non-Prescribed Annuity
A non-prescribed annuity works on an accrual method: as more taxable income is reported in the early years and declines every year so less taxable income is reported the longer the annuity contract is in force.

When do I receive annuity payments?

Immediate Annuity
With a immediate annuity you start receiving annuity payments as soon as you pay the premium, which is usually in a lump sum.

Deferred annuity
The payments to the annuitant start after a certain deferment period. Typically, the annuitant pays annuity premiums in instalments during the deferment period.
Generally, you will pay less premium for an annuity that provides future payments because the deferment period allows the insurance company to invest your premiums at a profit, thereby reducing the cost of the annuity to you.

How do I receive payments from an annuity?

There are several options that are used when the proceeds of an annuity are distributed.

Life Annuity

The first is a life annuity, which guarantees you a specified amount of income for your life. On death, the annuity payments cease and no value is available to be passed on to a beneficiary no matter how long the annuity is in force.

Life annuities with a Guarantee Period

A life annuity with a guarantee period on other hand provides you with a specified income for a guaranteed number of years (i.e. 10, 20…). The guaranteed period refers to the period for which the annuity will be paid out in the event of the death of the annuitant. For example, if the annuitant has a to age 90 guarantee and they die at age 72, the beneficiary will receive payments for another 18 years. If the annuitant lives beyond age 90, payments would continue until death, after which the beneficiary would receive nothing.

The longer the guarantee period, the lower the annuity payment.

Term Certain Annuities

A Term Certain annuity provides payment for a fixed number of years, and no value remains at the end of the term. Typical terms are 5, 10, 15, or 20 years, or to a maximum of age 90.

Joint and Last Survivor Life Annuities

Joint and last survivor life annuities are similar to single life annuities, but payments are paid to annuitant for as long as they both live. Upon the death of one of the annuitants, the payments continue to the surviving annuitants for the remainder of his or her life.
These annuities can be offered with a zero guarantee period in which payments would stop after the death of both annuitants or with a guarantee period that allows for payments to continue to a beneficiary. Another option available is to have the payments decrease upon the first death of the primary annuitant (usually to 50, 60, or 70%).

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