One financial
vehicle that seems to draw confusion among people is Prescribed Annuities.
People often get this "look" about them whenever the topic is brought up.
But annuities are really one of the most simplest vehicles one could
acquire.
Simply put, when you establish an annuity, you are
purchasing a lifetime income. Examples of annuities are, Canada
Pension Plan, Old Age Security, or your retirement pension from your
former place of employment.
See the advantages of insured annuities below.
Annuities can
help greatly in reducing tax and increasing retirement income. An
annuity is essentially a mortgage in reverse. You will transfer a
specified amount of money to an insurance company and in exchange they
will pay you a specific amount of money (typically either monthly,
quarterly, semi-annually, or annually) every year for the rest of your
life. This payment represents both a principal portion of your
capital which is totally tax free and a prescribed interest portion which
will remain the same each and every year and will be the amount you will
include in your income.
"But because interest rates are so low, it's not the right
time to buy an annuity!" is the comment often
made in low interest rate environments.
Click here to review the insured annuity
strategy and decide for yourself if the after-tax return you can achieve
is too low!
Because
the bulk of the payment is principal, your taxable income will be reduced.
However, payments may stop at death and no capital will pass to your
heirs. Life insurance is commonly used to replace this capital upon
death. Even with the added expense of the life insurance premium,
this strategy can significantly increase your after-tax income and
guarantee it for life while at the same time, preserve capital for your
heirs.
How much annual income could you be
losing if you are an investor who is rolling over 1-year GICs, year after
year, waiting for the rates to increase? The amount of additional
annual income that you could have is significant!.
Click here to see
the annual income you could have.
For those who are not concerned with capital preservation
to their heirs, you can simply purchase the annuity, which will greatly
increase your annual after tax income for life.
Advantages of Insured Annuities
over Traditional Interest-Bearing Investments:
-
Increased After-Tax Income
– The insured annuity will give a significant increase in after-tax income
compared to traditional interest bearing investments such as GICs or
Government of Canada Bonds.
Click here to see an example.
-
Lower
Taxable Income
–
Taxable income is lowered significantly as most of the annuity income is a
tax-free return of principal. The annuity is established on a prescribed
taxation basis which spreads out the income portion of the annuity over
the lifetime of the annuitant. The T4A that the annuitant receives each
year will be the same for their lifetime.
Click here to see an example.
-
Possible Reduction in Old Age
Security (OAS) Clawback - As mentioned above, the majority of the
payment received from a non-registered Prescribed Annuity is a tax free
return of principal. This will lower your annual taxable income each
year and if you are experiencing clawback on your OAS payments, this can
reduce (or possibly eliminate) this clawback.
-
No
more re-investment risk
– With an insured annuity, you don’t have to worry anymore about how long
to lock your money in with a GIC or a bond. Or
better yet, no more rolling
over those 1-year GICs each year waiting for the interest rate to go up.
-
Fully
guaranteed income
– Annuity income is guaranteed 100% up to $2,000 per month of income.
This is insured by Assuris which is the equivalent to the bank’s CDIC
coverage. You can find out more about this at their website at
the
Assuris website
.
-
Lifetime guarantee
– no matter how long the annuitant(s) live, the income will pay them for
their lifetime regardless of how long that is. If desired, the annuity
can be structured to have a minimum guarantee payment period in order to
recoup some or all of the principal regardless of when the annuitant(s)
die.
-
Creditor proof
– financial products with insurance companies are protected from creditors
in the event of insolvency or a law suit when you have a designated
beneficiary named on the policy. As long as you were solvent at the time
of establishing the plan, the funds are protected from creditors.
-
No
probate, legal or other administration
costs – At death, as long as there is a named beneficiary on the plan,
these funds will pass directly to the named beneficiary without forming
any part of the estate. This will then bypass all probate, legal,
trustee, and any other administration costs associated with winding up an
estate.
-
Prompt
Payment to Named Beneficiary(s) –
When
there is a named beneficiary on an insurance policy, payments are paid
directly to them without having to wait for the estate to be settled.
This gives the beneficiary(s) the funds immediately so that they can use
them as they see fit. These funds will be paid usually within 10
business days of the proper claim forms being submitted. With traditional
bank-held GICs, beneficiary(s) of an estate normally have to wait for the
will to be probated and the estate to be settled before receiving the
funds. This can normally take a minimum of 6 months.
-
Pension Tax Credit –
If
you’re over 65 and you don’t have any other qualifying income vehicles,
annuities qualify for the pension tax credit which means that you’re first
$2,000 of income is tax free.
-
Guaranteed Level Life Insurance Premiums –
The premiums for Term-100 life insurance are fully guaranteed and will
remain level for life, hence the name Term-100. If the insured person
lives to age 100, normally premiums will stop but the coverage will
continue for the life of the insured.
Click here to see an example.
