Annuities or GICs: Which Are Better?

Retirement Transition, Calgary

One of the challenges for creating retirement income is that interest rate yields have dropped so much and now taxes are increasing - it's what we call adding 'insult to injury'. If you are over the age of 60 this is something that you may want to consider as a way to set up a guaranteed income stream for life.

What is a Prescribed Annuity?

It is a contract between you and an insurance company where you give them a sum of money (non-registered) and they give you an income stream for life. You will no longer have access to that capital once you buy a Prescribed Annuity, however, you will have income for life. It's like another pension. Let's say Bill has $100,000 in a GIC at his Bank. He is earning 2% and the GIC is locked in for 5 years. He is earning $2000 in annual interest and if his tax rate is 30% he is earning an after tax income of $1400/yr. 

Bill is aged 65. If Bill were to buy a Prescribed Annuity Contract he could use his $100,000 to earn an income of approximately $5906.00/yr. (amount is based on age and gender). A Prescribed annuity is set up in such a way that a portion of your income is a return of your capital and a portion is interest. So, in Bill's situation, he would only pay taxes on $412.00, at a 30% tax rate that would only be $123.60.

Another creative strategy that some Prescribed Annuity holders can do is to also buy a life insurance policy for $100,000. This is an Insured Annuity. A portion of the proceeds from the Prescribed annuity can be used to pay for the life insurance premiums (let's say the premiums are $3400/yr). Upon death, the insurance policy will pay out $100,000 to the beneficiaries. This is much more beneficial than buying a GIC. Using this strategy Bill can use his $100,000 Prescribed Annuity to earn a larger and more tax-efficient income than with a GIC and, in addition to that, he can use the extra income to pay for an insurance policy that will provide a legacy of $100,000 to his heirs. Let's look at the math:

Bill's after tax income from a $100,000 GIC: $1400/yr.

Bill's after tax income from a Prescribed Annuity: $5782.40 ($5906 - $123.60)

Bill's after tax income from a Prescribed Annuity with a Life Insurance Policy payment added as a Legacy Gift:  After Bill pays the premium of $3400/yr. for the $100,000 life insurance policy he still has $2382.40 of income to live on ($5782.40 - $3400). This is much better than the $1400 GIC income, PLUS he will give his heirs $100,000 gift when he dies. 


What Changed in 2017?

The tax rates in the above example changed in 2017 for Prescribed Annuities. The taxable amount of the income Bill is receiving will increase dramatically for new contracts starting on Janruary 1, 2017. In Bill's case his taxable amount will go from $412/yr to $980/yr. That will be a significant amount of money over his lifetime. 

Click here to read this article from Sunlife explaining this in more detail.

Who would benefit from a Prescribe Annuity?

  • If you are 60+ and looking for a guaranteed source of income that will last the rest of your life
  • You have some non-registered money sitting in a GIC or cash at the bank
  • You do not want your nest egg exposed to the volatility of the stock market 
  • You want to minimze the tax payable on your income
  • You want to take advantage of the current tax-rate before the new rules take effect on Jan. 1/17

Nancy and I are licensed to sell annuities in Alberta and can help you explore if this is an appropriate strategy for you. Give us a call at 587-755-0159 to find out more.



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Willis & Nancy


Helping you get your financial house in order & enjoy your ideal retirement lifestyle



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