Buying an annuity can be a confusing endeavour for plan members. There are two basic types of annuities—term-certain annuities and life annuities—but there are also several different options that your plan member could possibly add to his or her annuity. Each option adds to the cost, and to the confusion. Keep in mind that not all options may be available to your plan members, so it’s a good idea to recommend that they get some professional financial advice before deciding.
The Basics
Term-certain annuities guarantee a set monthly income for as many years as the purchaser (also known as the annuitant) wants, up to age 90. If the annuitant dies before receiving all of his or her payments, the payments continue to go to the estate.
Life annuities give the annuitant a set monthly income for life. Payments stop when the annuitant dies. Extra options, called riders, can be added to a life annuity contract. However, each extra option lowers the monthly payment received by the annuitant.
Here’s a chart showing some of the available options and what they’re designed to do.
| Type of Annuity | What it Does |
| Straight life | Provides annuitant with income for life |
| Life plus five-year guarantee | Provides annuitant with income for life. Also guarantees 60 payments to the annuitant’s estate in case he or she dies within the first five years of the contract |
| Life plus 10-year guarantee | Provides annuitant with income for life. Guarantees 120 payments to the annuitant’s estate in case he or she dies within the first 10 years of the contract |
| Life plus joint-and-last survivor | Provides income for life for the annuitant and his or her spouse. Payments stop when both have died |
| Indexed life | Provides income for life. Payments increase with inflation |
Several other factors can affect the annuitant’s monthly income. Here’s a look at a few:
Age – The older the annuitant is, the more money he or she will get (because the annuitant is not expected to live as long).
Health – If the annuitant has health problems, he or she may get a higher monthly income (again, because the annuitant is not expected to live as long).
Gender – Women get a lower monthly income than men, because they are likely to live longer.
Interest rates – If interest rates are low, as they are now, annuities become very expensive, so the annuitant will receive lower payments.
Amount used to buy the annuity – The more money an annuitant puts into the annuity, the more he or she will get back as income.
Annuities offer the benefit of fixed monthly payments. Some plan members may appreciate the peace of mind that comes with knowing that their income will remain steady over the course of their retirement. However, once an annuity is purchased, the monthly payments are set and the buyer cannot suddenly change his or her mind.
If your DC plan offers annuities as an investment option at retirement, it’s wise to suggest to members that they get some financial advice to help with the decision.
Andrea Davis is a freelance writer in Guelph, Ont. andrea.davis@rogers.com