Are high interest rates making annuities more attractive?
February 2, 2023
One of the few things that cost less when interest rates go up are annuities, long a key piece of the puzzle when turning retirement savings into income.
Save with SPP reached out to the Canadian Life and Health Insurance Association (CLHIA) to find out if this recent higher-interest environment is making Canadians think harder about annuities.
According to the CLHIA, Canadians purchased over $1 billion in individual pay-out annuities in 2021. This includes both life and term-certain annuities from registered and non-registered funds.
You can buy an annuity from a provider, usually an insurance company. In exchange for a lump sum, the provider will pay you a monthly income for life or for a selected period of time. We contacted Noeline Simon, Vice President of Taxation, Pensions and Reporting for CLHIA, to ask a few other questions about annuities.
Q. With higher interest rates of late are CLHIA’s members seeing more interest in annuities?
A. All else being equal, higher interest rates should result in higher annuity benefit payouts. This should have a favourable impact on demand for the product, however, there may be some time before we see the full evidence of this in the market.
Q. Do you see one benefit of annuities being insurance against volatility? (If markets go down, your annuity payments stay the same.)
A. Yes. A significant benefit of guaranteed life annuities comes from the down-side protection against adverse market conditions and the annuitant out-living their anticipated savings.
Q. Did the last 20 years or so of low interest rates sort of deaden interest in the idea of annuities versus registered retirement income fund (RRIF) conversions?
A. The prolonged low interest rate environment did contribute to dampening annuity sales, even with increasing interest rates it will take time to change retirees’ demand for annuities.
Q. What do you see as the pros and the cons of annuities?
A. Canadians who are retiring or nearing retirement should consider guaranteed life annuities as a part of their plan, since they provide downside protection against adverse market conditions and reduce the risk of outliving one’s savings. Life and health insurers believe that retirees really can benefit from having a range of choices in terms of products and solutions that can help them optimize their income in retirement. To this end, the CLHIA and others have advocated for a variety of decumulation tools, such as Advanced Life Deferred Life Annuities (ALDAs) and Variable Payment Life Annuities (VPLAs) and will continue to so into the future.
We thank Noeline Simon for taking the time to answer our questions!
Did you know that the Saskatchewan Pension Plan is also an annuity provider, and offers a variety of annuity options for its retiring members? According to SPP’s Pension Guide, SPP offers a life only annuity (no survivor or death benefits, but highest payment to you), a refund life annuity (provides a benefit to survivors on your death), joint and last survivor annuity (provides a lifetime pension on your death to a surviving spouse or common-law partner). The joint and last option allows you to choose, for your survivor, a pension equal to 60, 75 or 100 per cent of what you were getting. Contact SPP for more information about the annuity option at retirement.
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.