Securing Guaranteed Interest Rates with Annuities
May 17, 2023
When inflation is in the news there is increased focus on guaranteed interest type products, namely, annuities. But what exactly is an annuity and how does it work?
An annuity offers you, the investor, an opportunity to relinquish a lump sum of money in exchange for a guaranteed periodic level cash flow. The periodic amount you receive is based on your age, gender and prevailing market rates. There are two main types of annuities: a “term certain annuity”, where a period of time is specified for the cash flow, and a “lifetime annuity” where the cash flow is guaranteed for life. In either case, the market risk is taken out of the equation, as the cash flow is guaranteed for the pre-determined amount of time. Below are a few more things to consider.
The Risk Averse Investor
If you are a risk averse investor entering your retirement years, you might be interested in buying an annuity in your RIF (Retirement Income Fund) which will ensure that you receive a guaranteed amount during those retirement years. While this amount may not be as high as it could be if you were to take on some risk, the amount is guaranteed and can offer you the peace of mind that comes with guaranteed cash flow.
Annuity Settlement Option
If you are an annuitant to a segregated fund and you pass away, your assets will flow to your designated beneficiary. If there is any concern over whether the beneficiary can manage such a large lump sum of cash, an annuity settlement option can ensure that after your death, your beneficiary will receive level, periodic cash flow on a monthly/quarterly/yearly basis for a certain term, or for the remainder of their life.
A Hybrid Approach
If you are a long-time employee of a company, you may be eligible to receive a defined benefit or defined contribution pension plan as part of your benefits. And when it comes time for you to leave your place of work, you will have to make some choices as to what to do with your pension. Your first option is that you can commute your pension to a LIRA (Locked-In Retirement Account), construct a portfolio and take on some risk, allowing you to draw income as needed as long as your yearly income amount exceeds your RIF minimum. Secondly, you can leave your pension as is and take the income outlined in your pension documents. Finally, you could receive the same cash flow as outlined in your pension through this hybrid strategy. Insurance carriers can often offer the same cash flow through this strategy using only a portion of your commuted pension value, which would result in any excess pension funds being returned to you in a lump sum. Whether or not an insurance carrier can offer a superior pension is contingent upon a host of factors to be considered with your Advisor.
Guaranteed Lifetime Withdrawal Benefit
Some insurance carriers offer a GLWB (Guaranteed Lifetime Withdrawal Benefit) segregated fund contract. A unique insurance product, GLWBs tend to be popular when interest rates are high. A GLWB can be thought of as a hybrid between a segregated fund and an annuity. You deposit a lump sum and are guaranteed a cash flow for the remainder of your life; however, this cash flow will be generated from a diversified portfolio in a segregated fund wrapper. This type of solution offers the benefits of a segregated fund like creditor protection, named beneficiaries on unregistered accounts, death and maturity benefits, etc., and also provides guaranteed cash flow like an annuity. Additionally, there are oftentimes provisions in the contract that increase the amount paid as you age and income can be waived in a given year to increase income in subsequent years, allowing you some flexibility for the cash flow.
Definitely a few options to consider when it comes to annuities. In a higher interest rate environment, annuities and their variations certainly have their advantages and can be viewed as another option available to you and your family.
If you’re interested in a similar article, read Inflation, Interest Rates and Your Investments and for more information on annuities and how they can help you secure guaranteed interest rates, contact us.