If you’re approaching the age when you must close your registered retirement savings plan (RRSP), it’s a good time to consider annuitizing at least part of your savings. Canadian law requires RRSPs to be closed by the end of the year you turn 71. Because cashing out and paying tax on the entire balance is generally impractical, most people either convert their RRSP to a registered retirement income fund (RRIF), buy an annuity, or use a combination of both.
For years many Canadians avoided annuities while interest rates were near zero, but with rates nearer to 5% the conversation is changing. Those without employer-sponsored defined benefit (DB) pensions and who hold substantial RRSP savings are often the best candidates for annuitization. Even with inflation-indexed public benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS), some retirees prefer to transfer stock market and interest-rate risk to insurance companies by buying annuities.
As I approach this decision personally, I consulted several experts to understand whether the argument for annuitizing—especially partial annuitization alongside a RRIF—is stronger now. The consensus from planners and academics is shifting toward considering annuities as one piece of a diversified retirement-income plan.
The case for gradual partial annuitization
Moshe Milevsky, a prominent retirement researcher and author of Pensionize Your Nest Egg, favors a “slow partial” approach to annuitization rather than annuitizing everything at once. The idea is to buy annuities in stages: start with a modest income stream and gradually increase annuitization over time, buying larger tranches when rates are attractive or when your circumstances change. This strategy helps smooth interest-rate risk and can reduce the behavioural strain of committing all savings at once.
How much to annuitize depends on your existing guaranteed income—DB pensions, CPP and OAS—your health, and how much liquidity you need. Even modest annuity holdings can reduce longevity risk (the risk of outliving your savings) and provide a predictable base of retirement income. Milevsky and several academics argue this staged approach is often optimal from both mathematical and practical perspectives.
Protracted inflation makes former annuity fan more cautious
Not every expert is fully sold on annuities right now. Fred Vettese, who has advocated annuities in the past, is more cautious after recent bouts of inflation. He notes that assumptions of permanently low inflation have been challenged, and future inflation spikes are possible even if the timing is uncertain. For older retirees—those already 70 and up—Vettese still sees a role for annuities but recommends limiting purchases to a portion of assets, perhaps around 25% of an RRSP or RRIF in some cases.
Inflation-indexed annuities would be ideal in theory, but insurers have long been reluctant to offer them at favourable prices. Indexed products are more expensive because they insure both price level and longevity. Milevsky acknowledges their benefits but points out they cost more and are not always necessary: public benefits like CPP and OAS already adjust for inflation, and many retirees’ expenses decline or change over time. He also emphasizes that inflation protection can be achieved through asset choices—real assets, dividend-growing stocks, commodities and other holdings—rather than only through inflation-indexed income.
Financial planners often recommend that the portion of a RRIF not converted to annuities should include some inflation-hedging assets: dividend-aristocrat stocks, exchange-traded funds that focus on rising payouts, real asset funds, precious metals, commodities or energy stocks. These holdings can help preserve purchasing power even if annuity income isn’t directly indexed to the consumer price index (CPI).
Bloggers and planners such as Robb Engen have argued for annuities as interest rates rose last year, noting how these products reduce longevity risk and provide a stable income stream. At the same time, annuity payout rates haven’t always jumped dramatically with short-term rate increases because annuities are priced off longer-term yields and insurers are cautious about long-term commitments.
“Annuities fell out of favour (if they ever were in favour) when interest rates plummeted over the past 10-15 years. But with interest rates on the rise, annuities are certainly worth another look.”
Prescribed annuities versus registered annuities
There are tax and structural differences between prescribed (non-registered) annuities and registered annuities held inside RRIFs. A prescribed annuity can be very tax-efficient for non-registered funds because a portion of each payment is treated as tax-free return of capital, reducing the taxable portion. In contrast, annuity payments from registered assets such as RRIFs are typically fully taxable as income.
For those considering partial annuitization, financial planners sometimes recommend using non-registered money for prescribed annuities first, then using RRSP or RRIF assets if liquidity needs permit. Assuris, the nonprofit that protects policyholders in case of insurer failure, has expanded income protections on annuities, increasing the guaranteed monthly income threshold for policyholders.
Given the mandatory decision about RRSPs by age 71, many retirees are choosing a cautious, incremental path: convert a portion to a RRIF for flexibility and ladder in annuity purchases over time. If annuity payouts improve or mortality credits rise as you age, you can consider adding additional annuity tranches later. This blended strategy preserves liquidity, adds guaranteed income, and helps manage interest-rate and longevity risks.
More from Retired Money:
- The five factors of retirement for Canadians
- Should you cash out your workplace pension when you leave a job?
- How retired parents can use the FHSA to help their adult children
- Is now the time for retirees to sell stocks and buy GICs?