Annuities

Question 1

When may an investor purchase an annuity?

Answer 1

• if they want a guaranteed income for life that they do not want to outlive
• if they want a guaranteed income for a set period of time
• if they’re not interested in making ongoing investment decisions
• if they want a simple, low risk investment
• if they own a LIF
• if they received money from legal settlements that necessitate a lump sum amount be used to support a regular income flow
• to diversify their portfolio
• to make a charitable donation

Question 2

A registered annuity can be purchased from which plans that contain registered money?

Answer 2

• RRSP
• LIRA or locked in RRSP
• DPSP
• RPP
• RRIF, LIF, LRIF & PRRIF
• Refund of premiums
• Designated benefit

Question 3

Does an annuitant have to pay taxes on a registered annuity?

Answer 3

Yes

Question 4

Funds from an RRSP or RRIF used to purchased a term certain annuity, how long must be the term for?

Answer 4

To age 90 of the annuitant or the spouse

Question 5

What must all registered annuities be?

Answer 5

Immediate annuities, with payments beginning in the year after the purchase year.

Question 6

Term certain annuities may not be purchased with assets from which plans?

Answer 6

• RPP
• LIF
• LRIF

Question 7

Do non registered annuities need to have the same person as the plan owner and annuitant as with registered annuities?

Answer 7

No.

Question 8

What are the tax implications for registered vs non registered annuities?

Answer 8

Registered annuities are fully taxable.

Non registered annuities are taxable only on the interest component. They have the return of capital component and the interest component.

Question 9

What are the two types of tax treatment for non registered annuities?

Answer 9

Prescribed taxation

Non prescribed taxation

Question 10

What is non prescribed taxation?

Answer 10

The interest portion of non registered annuities are higher in the earlier years so the taxation is higher for the interest portion in the higher years.

Also known as front end taxation.

Question 11

What is prescribed taxation?

Answer 11

There is a level taxation for the duration of the annuity. It assumes the interest is spread out on a level basis of the contract. So less tax is paid in earlier years.

Only available for non registered annuities.

Question 12

Can a prescribed annuity have a different owner from the annuitant?

Can it also have a corporation own the annuity?

Answer 12

No to both.

Question 13

Is there an opportunity to use an indexed (inflation indexing) feature with a prescribed annuity?

Answer 13

No, payments must be level, not increasing.

Question 14

What are the other requirements fit a prescribed annuity?

Answer 14

• Guarantee period can’t extend past age 90
• Annuity must begin immediately with first payment before the end of the year in which the annuity is purchased
• Contract is irrevocable, cannot be commuted except at annuitant’s death
• Must elect prescribed treatment at time of purchase hence why carries provide prescribed treatment as a default unless it’s changed
• The joint & last survivor is only allowed if the contingent owner is a spouse, sibling or spousal trust with annuity payable to death of spouse

Question 15

Do non registered payments received after age 65 qualify for the pension amount federal tax credit?

Answer 15

Yes

Question 16

What is a straight life annuity?

Answer 16

A life annuity with no guarantees, so no death benefits or annuity payments are paid to a beneficiary

Question 17

What is the advantage of having a guarantee period with a life annuity?

Answer 17

It reduces the risk to the annuity owner

It provides some level of assurance as to a minimum level of return

Question 18

What is the disadvantage of having a life annuity with a guarantee period?

Answer 18

It increases the cost of the annuity or decreases the payments from the annuity

Question 19

What is an indexed annuity?

Answer 19

An annuity that allows an annuitant to hedge against inflation with annual increases to the regular payment schedule up to a maximum.

Question 20

What type of annuities can’t be indexed?

Answer 20

Prescribed annuities

Question 21

What are temporary annuities or bridge annuities? And when can they be used?

Answer 21

They are annuities that provide payments for a specified period of time provided annuitant remains alive.

Can be used in a situation where an annuitant who is retiring early may want to bridge the income gap between their early retirement date and their regular retirement date.

Question 22

What is the difference between a term certain annuity and a temporary annuity?

Answer 22

If an annuitant dies within the period/term:

A term certain annuity will continue the payments to the beneficiary for the remainder of the term or commute the value and give it to the beneficiary.

A temporary annuity will stop and the contract will expire.

Question 23

Can temporary annuities be purchased with registered funds?

Answer 23

No

Question 24

What is an impaired annuity?

Answer 24

An impaired annuity is a special annuity that is designed to pay a higher income to an annuitant who has been diagnosed with an illness or disability that may reduce his/her life expectancy.

Only life insurance companies can offer impaired annuities

Question 25

Can both registered and non registered funds be used to purchase an impaired annuity?

Answer 25

Yes

Question 26

Can an impaired annuity be a joint annuity even if the spouse is healthy?

Answer 26

Yes

Question 27

What is the taxable portion based on for both prescribed and non prescribed impaired annuities and what is the best or most tax efficient?

Answer 27

Prescribed impaired annuities base the taxable portion on the actual age of the annuitant

Non prescribed impaired annuities base the taxable portion on the impaired age.

Non prescribed taxation is more tax efficient to use for impaired annuities.

Question 28

What are the differences between fixed and variable annuity?

Answer 28

A fixed annuity has a fixed or guaranteed amount of payment throughout the term of the annuity.

A variable annuity has a non guaranteed payment that increases or decreases based on the fluctuations of the investment options chosen.

With a fixed annuity, investment risk lies with the institution providing the annuity.

With a variable annuity, investment risk lies with the annuitant.

Question 29

In what scenarios would an annuitant’s spouse receive periodic payments upon death of annuitant, assuming spouse elects periodic payments? Give two examples.

Answer 29

1. Annuitant had purchased a life annuitant with a guarantee period and the period had not expired upon death and spouse elected periodic payments to continue instead of receiving commuted payment.
2. Annuitant had purchased a term certain annuity to age 90 and the term was not exhausted before death and spouse elects to continue to receive payments.

Question 30

What are the tax implications for a registered annuity guarantee payable to someone other than the deceased spouse upon death of an annuitant?

Answer 30

The carrier commutes the remaining payments and the lump sum is treated with similar rules to an RRSP (re qualifying beneficiaries and designated benefits).

Question 31

What are the tax implications for non registered annuities if the payment is the following?

1. Commuted
2. Non commuted

Answer 31

1. Commuted - the balance is treated as taxed paid capital with no immediate tax consequences
2. Non commuted - the beneficiary steps into the annuitant’s position and is taxed on future payments received similar to the original annuitant.