Why Canadians Avoid Annuities for Retirement Income

The Annuity Puzzle describes a persistent Canadian dilemma: despite strong financial arguments for life annuities, most retirees avoid buying them. Annuities promise guaranteed lifetime income, protection from market crashes and a hedge against outliving your savings—yet take-up remains low.

Experts such as finance professor Moshe Milevsky and actuary Fred Vettese argue that converting part of your savings into guaranteed lifetime income is one of the most effective ways to reduce retirement risk. Their book title, Pensionize Your Nest Egg, captures the idea: transforming assets into a steady, pension-like income stream can relieve the pressure of managing investments in later life.

In simple terms, a life annuity is longevity insurance. You give a lump sum to an insurer and receive a monthly payment for as long as you live. If you live to 100, the insurer keeps paying. If markets crash, your income continues. For retirees concerned about running out of money or suffering early-sequence losses, annuities neutralize both longevity risk and sequence-of-returns risk.

Despite those benefits, only a small fraction of eligible Canadians buy annuities. Behavioral hurdles are a key reason: many fear losing liquidity and control over their capital, and some worry about reducing inheritances if they die early. Research also shows many retirees are simply opposed to voluntary annuitization because they prefer to retain control over their savings.

A chance to lock in recent portfolio gains?

Some retirees are motivated to buy annuities after a period of strong market returns. For those who have enjoyed solid gains over the past two decades, annuities offer a way to lock in a portion of those gains as guaranteed income. Others who enjoyed higher GIC rates in recent years may be disappointed by current GICs and find annuities, which recently reached more attractive levels, worth considering.

Annuities let you lock in a payout rate for life, so if you purchase at a favorable time you can secure a predictable income stream that outlasts market volatility. This predictability is why many see annuities as a personal funded pension.

Related reading: GICs vs. annuities

In Canada, several life insurers offer annuities. Major providers include Desjardins, RBC Life Insurance, BMO Life Insurance, Canada Life, Manulife, Sun Life, Equitable Life and Empire Life. These providers participate in Assuris, which protects policyholders by guaranteeing annuity payments up to a defined limit if a company fails. This backstop reduces counterparty risk for annuity buyers.

To set up a traditional life annuity, you transfer registered or non-registered funds to an insurer in exchange for lifetime income. Unlike some U.S. products, you cannot generally add money to an existing annuity or combine different sources of funds within the same contract; however, you can purchase additional annuities over time. Annuities do not require medical underwriting like life insurance, and joint annuities for couples are available, though tax slips are issued to the primary annuitant and income splitting rules may limit tax flexibility.

When annuities shine

Annuities are most attractive to retirees who expect to live a long time or who place a high value on predictable income. With a guaranteed monthly payment, you can weather fluctuations in other parts of your portfolio and reduce stress about market downturns. Current payout ranges can be meaningful depending on age: older purchasers receive higher immediate payouts, reflecting shorter expected payout horizons.

Securing enough guaranteed income from annuities, pensions, CPP and OAS can allow the remainder of your portfolio to pursue growth, taking on more risk if desired. That combination creates an “income floor” that simplifies retirement planning and offers peace of mind.

Funding by registered vs. non-registered accounts

How you fund an annuity affects tax treatment. Transferring registered funds into an annuity generally happens tax-free because the funds remain in a registered environment; the annuity income is then taxed when you receive it. Funding an annuity with non-registered money can trigger capital gains on appreciated assets when you sell, but prescribed annuities offer relatively tax-efficient treatment because much of the return is treated as a return of capital with only the gain being taxable. Prescribed status aims to level the taxable portion of payments over the life of the contract.

There are also products that mimic some annuity characteristics, such as pooled longevity funds or certain retirement income funds. These can complement annuities by offering mortality credits and potentially higher late-life payments, though structure and risk differ from traditional annuities.

Many retirees find the idea of buying an annuity becomes more appealing as they approach RRIF age and seek predictable retirement income. Financial planners often recommend annuitizing a portion—commonly suggested in the range of 20–30%—to transfer part of the longevity and market risk to an insurer while keeping the remainder invested for growth.

Evaluate your overall financial trajectory before committing

Before buying an annuity, it’s important to model how it changes your overall financial picture. Tax-sensitive planning tools and comprehensive cash-flow projections can reveal trade-offs that aren’t obvious at first glance. For some people, annuitizing a large sum could push them into downsizing their home sooner than planned or force undesired borrowing against home equity. Integrating annuities into a full financial plan helps reveal such consequences.

A small experimental annuity allocation can be a prudent way to test the waters. One couple, after advice and research, annuitized small portions of retirement accounts and later decided to add another chunk as their RRSP-to-RRIF conversion approached. Their approach illustrates using annuities selectively rather than treating them as an all-or-nothing decision.

How much can annuities pay?

Payouts depend on age, sex, product type and whether payments are joint or single-life. Sample payout tables illustrate how a fixed principal translates into different monthly incomes for different ages and sexes. For many retirees, those payouts represent an attractive, stable supplement to government pensions like CPP and OAS.

So why don’t more Canadians buy annuities? Key barriers include loss of liquidity, control and legacy concerns, product complexity and low awareness. Advisor bias and the lack of fully inflation-indexed annuities in Canada also dampen enthusiasm. Despite these obstacles, annuities can play a valuable role for retirees who want secure income, reduce portfolio stress and gain peace of mind in later years.

Consider annuities as one component of a diversified retirement income plan that blends guaranteed income with growth assets. For many retirees, carving out a portion of savings to create a personal pension can add a dependable, professionally managed income stream that requires no ongoing investment decisions.

Read more about Retired Money:

• The 4% rule, revisited: A more flexible approach to retirement income
• Who you gonna trust: Barry Ritholtz or Jim Cramer?
• Why retirement planners are getting defensive
• How financial journalists plan their own retirement