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The Difference Between Payout Annuities and RRIFs

By RBC Insurance • Published October 3, 2023 • 10 Min Read

What exactly is a RRIF? What is a payout annuity? If you’re starting to plan for your retirement years, you’ll soon be saying “goodbye” to familiar savings vehicles such as Registered Retirement Savings Plans (RRSPs) and focusing on retirement income products such as RRIFs and payout annuities. And once you retire, payout annuities and/or RRIFs are likely to become pillars of your post-work income stream strategy.

Both options offer a way for retirees to create an income stream from their RRSPs to help meet their financial needs, but they differ in the way they operate and the financial situations they best suit.

When planning for your retirement, you’ll want to understand the differences between the two options to determine which one might be the right fit for you. You may even consider a combination of both products.

Once you have a better understanding of the options available to you, you’ll be able to make an informed choice that allows you to enjoy your retirement years to the fullest.

Key takeaways

  • There are important differences between payout annuities and RRIFs, and each one has its own set of potential pros and cons.

  • Payout annuities provide guaranteed stable income payments for a fixed term or for life.

  • RRIFs offer flexibility in terms of when and how much you withdraw (subject to annual minimum withdrawal requirements), as well as control over your investment, but they come with greater risk due to market fluctuations.

  • Your personal circumstances and financial goals in retirement are two key factors to consider before you invest in a specific product.

How do payout annuities work in retirement?

A payout annuity is an insurance product that provides guaranteed income for a set term or for life—it’s up to you to decide. When considering options for your RRSP, payout annuities may be a good choice for people who are:

  • Risk-averse when it comes to market fluctuations

  • Looking for a guaranteed stream of income for life or for a set period of time

  • Looking for fixed and regular payouts

  • Concerned about outliving their retirement savings

  • Lacking the time and skills to manage their own investments (or simply don’t want to).

There are several factors to consider when you’re selecting your payout annuity:

  • How often you’d like to receive payouts. Typical payout schedules are monthly, quarterly, semi-annually, or annually.

  • Do you want to guarantee income for yourself and your spouse/common-law partner, or just yourself?

  • Do you want added protection with a guaranteed period?

Those who choose to invest a portion of their retirement savings into a payout annuity could benefit from a guaranteed income stream with regular payments and a sense of security in knowing how long their income stream will last, whether that’s for a fixed term or for life.

What are some of the different types of payout annuities?

The type of payout annuity you choose will depend on your financial goals and your family’s needs. There are many options available, and each one deserves careful consideration. Here are three common types of payout annuities.

Single Life Annuity

This type of payout annuity provides a series of guaranteed income payments for the life of one person (known as the “annuitant”). When the annuitant dies, the payments stop.

Joint Life Annuity

A joint life payout annuity provides a series of guaranteed income payments for the lives of two annuitants (usually the individual and their spouse or common-law partner, though sometimes also a financially dependent child) during a joint lifetime. When one of the annuitants dies, the payments will continue to be made to the surviving annuitant until the end of their life. This is also sometimes called a “survivor annuity.”

Term-certain Annuity

The key difference in this type of payout annuity is right there in the name—instead of providing payments for life, a term-certain annuity ends on a specific date (at the end of the term that was agreed upon when the annuity was initially set up), or until the individual reaches a certain age.

The benefits of payout annuities

A payout annuity is an effective, easy-to-manage solution that provides you—or you and your spouse/common-law partner, if you choose—with a guaranteed level of income for the rest of your life or for a specified number of years. It can help cover your fixed expenses during your retirement years. That’s why it’s considered a foundational product for a well-balanced retirement portfolio, as it’s reliable and offers a level of predictability and stability once you retire.

Other benefits include:

  • Income security: Regular guaranteed payments are unaffected by changes in interest rates or the stock market.

  • Tax benefits: The amount directly transferred from an RRSP to buy an annuity is not considered a taxable income. Only the payouts from the annuity are considered taxable income and, as a result, they provide some degree of continued tax deferral.

  • Estate planning: A spouse/common-law partner or beneficiary can be added to receive the remaining payments should the annuitant die before the end of the guarantee period. The amount goes directly to the spouse or beneficiary and does not have to go through probate.

  • Easy management: Once you purchase your fixed payout annuity, you’re set. There are no ongoing investment decisions to make.

Considerations and potential drawbacks of annuities

A payout annuity is a product designed for those who prefer predictability and security over liquidity and market risks. Most annuities cannot be surrendered or altered after you start taking income. Why? You’re exchanging control for the assurance of guaranteed income payments for life or for a set term. 

People who think they can get a better rate of return over time than the insurance company provides and wish to continue managing their investments might find other options that better suit their needs. Also, while a payout annuity provides stable payments and security, inflation can eat away at the purchasing power of the annuity payouts.

When considering any payout annuity, make sure to consult with a licensed insurance advisor. Ask lots of questions and invest plenty of time in going over the terms and conditions of the payout annuity you choose, so you fully understand it.

How do RRIFs work in retirement?

If flexibility is a priority for your retirement years, then a RRIF may be an option to consider when your RRSP matures. They’re a popular choice when converting RRSPs into a retirement income plan, as they offer flexibility and allow you to continue to make and manage all your investment decisions.

You’ll need to convert your RRSP to a RRIF by the end of the year you turn 71 (or sooner, if you need income). Your investments transfer directly and don’t have to be liquidated. And similar to an RRSP, the growth earned in a RRIF is not subject to annual taxation. Only the amounts withdrawn are subject to taxation.

The benefits of RRIFs

If you’re looking for greater financial choice in your retirement years, RRIFs might be able to offer you that. In addition to flexibility, they can also provide more control if you wish to make specific choices about where and how to invest your savings. Those decisions might result in growth and a higher income within a RRIF. Smart investments within a RRIF can also lead to a greater potential to leave behind a legacy for your family and beneficiaries.

Instead of fixed and regular payments, if you invest in a RRIF, you can withdraw variable amounts from your plan (subject to minimum annual withdrawal rules) as your financial needs change.

There are many variables to consider when withdrawing money from your RRIF, so speak to your financial advisor to understand the benefits and risks.

Considerations and potential drawbacks of RRIFs

As anyone who’s ever invested money knows, greater flexibility and potential for growth typically come with greater financial risk. Market volatility can affect or cause irreversible damage to your RRIF investments. It may not be a wise strategy to opt for high-risk investing in your retirement years. Careful attention needs to be paid to your investment strategies within your RRIF.

Consider consulting an investment professional for monitoring and advice on where to invest your RRIF funds. Depending on market activity, adjustments should be made to your RRIF portfolio, so your retirement savings remain as secure as possible and your financial needs can be met as they change over time.

Another potential drawback is that your RRIF might not provide a guaranteed income for life. There’s a chance you’ll outlive the savings in your RRIF.

Choosing between payout annuities and RRIFs—factors to consider

Personal circumstances and financial goals

Here are some things to consider when choosing an income stream strategy for your retirement years:

  • Your (and, if applicable, your spouse or partner’s) age and health, expected longevity, and possibility of surviving beyond that age.

  • Your retirement goals, including your desired lifestyle, expenses, and what you hope to leave behind for your family and beneficiaries.

  • Your own abilities for monitoring your investments and making investment decisions on a regular basis as you age. Assess these honestly.

  • Your tolerance for risk in terms of market fluctuations. Would the negative impact of a market downturn on your investments be financially devastating?

Risk and return analysis

Finding a balance between risk and return that suits both your personal preferences and your financial position is important. Of course, higher-risk investing might be enticing with the possibility of higher potential returns. Good decisions and the right market can offer growth within your RRIF, but how much risk are you willing to tolerate?

With a payout annuity, the market can’t affect the retirement income. But you’re giving up growth potential and control over your money in exchange for stability.

Tax considerations

Withdrawals from RRIFs and payouts from registered payout annuities are considered fully taxable income for the year in which they take place.

When a RRIF annuitant passes away, the fair market value of the RRIF investments will be included as income in the final tax return of the deceased annuitant, unless it can be rolled over to the surviving spouse or common-law partner, child, or even a grandchild.

If the annuity does not have a guarantee period, or the guarantee period has ended, the payout ends when the annuitant (or the surviving annuitant, in the case of joint life annuity) dies. As a result, there’s no additional income reporting.

If the guarantee period hasn’t ended when the annuitant dies, and the surviving spouse or partner is the beneficiary, the payouts made for the remainder of the guarantee period will be taxable income to the receiving spouse.

However, when a lump sum payment of a commuted value (the present value of the future payouts for the remainder of the guaranteed period) is made to the beneficiary, it’s considered taxable income to the deceased annuitant.

The tax considerations discussed here are general in nature. It’s important to seek professional independent tax and legal advice before taking any action.

If you’re planning your estate and have a RRIF and/or a payout annuity, make sure your financial advisor knows your wishes and that you understand the tax implications of the various options available for you and your beneficiaries.

RBC Retirement Investment Solutions

Whether you’re building up your nest egg or ready to turn your hard-earned savings into retirement income, our solutions can help you make the most of your money. Have an RBC Insurance Advisor call you to learn more.

*Home and auto insurance products are distributed by RBC Insurance Agency Ltd. and underwritten by Aviva General Insurance Company. In Quebec, RBC Insurance Agency Ltd. Is registered as a damage insurance agency. As a result of government-run auto insurance plans, auto insurance is not available through RBC Insurance in Manitoba, Saskatchewan and British Columbia.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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