Annuities: Prescribed vs. Non-Prescribed

.... Contmplating Retirement?
Consider Annuities as a part of your Investment Strategy.

As we get closer to retirement many of us change our thoughts from "how are we going to make our goals a reality..." to "now that we have the money...what is the best way to make sure it lasts?"

Typically people nearing their retirement seek investment vehicles with the following characteristics:

• Low Risk
• Preferential Tax Treatment
• Increased Retirement Income

In order to meet these goals, some people invest their savings in GIC's or other guaranteed investment vehicles. Although GIC's are a safe investment choice, they don't deliver tax advantages or offer particularly attractive rates of return.

Furthermore, if interest rates fall as the GIC reaches maturity, the GIC may become a source of anxiety for the retiree who finds him or herself faced with a reduced rate of return. Why not consider an annuity to overcome these obstacles?

An annuity is the simplest of the retirement income options. It is a contract, bought with a lump sum, which provides you with a guaranteed stream of payments. The term payments could be specified (annuity certain), or for life (life annuity). An annuity functions in a similar manner to a mortgage - but in reverse. You pay the insurance company a lump sum, and in return, the company provides you with income payments (typically on a monthly basis) which are a combination of interest income and of capital. However, as early annuity payments are composed of mainly of interest income, the beneficial tax effect may be reduced.

Luckily, Prescribed Annuities circumvent this problem.

Where straight annuities have a decreasing tax liability, prescribed annuities spread the tax load over the life of the annuity to level the tax effect and provide a constant after tax income. The result of the prescribed annuity's tax leveling effect is initially and increased after-tax income when compared to a straight annuity. In addition, as the annuity is guaranteed, a retiree can rest assured that their income stream would not be at the mercy of current GIC rates.

Although neither the straight annuity or the prescribed annuity preserve the retiree's capital for passage to heirs upon death, oftentimes the benefit of a guaranteed and worry-free income stream outweighs the importance of passing cash on to the heirs.

In summary, annuities (and prescribed annuities in particular), offer an attractive alternative for older people who face a cash flow shortage or who simply desire a guaranteed stream of income which offers tax advantages.