Annuities in Canada: How They Work and When They Make Sense
An annuity is the mirror image of life insurance. With life insurance you pay an insurer over time and they pay your family a lump sum when you die. With an annuity you hand an insurer a lump sum and they pay you an income for the rest of your life. It is the only product sold in Canada that can guarantee you will not outlive your money.
Annuities have been unpopular for most of the last two decades, and for one simple reason: interest rates were on the floor, and a product whose payout is driven by interest rates looked terrible. That maths has changed. Anyone building a retirement income plan in 2026 should at least know how annuities work before ruling them out.
How an Annuity Actually Works
You give an insurance company a lump sum — say $200,000. In return, the company contracts to pay you a fixed amount every month for as long as you live. The payment is set on day one and it never changes (unless you buy an indexed version, more on that below).
The insurer prices your payment using four inputs:
- Your age. The older you are when you buy, the higher the monthly payment, because the insurer expects to pay for fewer years.
- Your sex. Women live longer on average, so a woman buying at the same age as a man receives a smaller monthly cheque for the same deposit.
- Interest rates at the moment you buy. This is the big one, and it is the reason timing matters so much.
- The options you attach — guarantee periods, survivor benefits, indexing. Every option you add lowers the base payment.
Once the contract is issued, it is done. The rate is locked, the payment is locked, and in almost every case you cannot cash it out or change your mind. That irreversibility is simultaneously the product's greatest strength and its greatest weakness.
The Main Types Sold in Canada
Life annuity
Pays until you die, however long that takes. This is the pure longevity insurance version and it produces the highest income per dollar deposited. If you die three years in, the insurer keeps the balance — which is precisely why most buyers add a guarantee period.
Life annuity with a guarantee period
Pays for life, but if you die before the guarantee period expires (commonly 10 or 15 years), the remaining payments go to your beneficiary or estate. A 10-year guarantee typically costs you a few percent of monthly income. Most Canadians who buy annuities choose this structure.
Joint and survivor annuity
Written on two lives, usually spouses, and continues until the second person dies. You choose what percentage continues to the survivor — 100%, 75%, or 60% are the common settings. A 100% joint-and-survivor contract pays noticeably less per month than a single-life contract because the insurer is insuring two lifespans.
Term-certain annuity
Pays for a fixed number of years rather than for life. If you buy one with registered money, the term generally has to run to age 90. This is income smoothing, not longevity insurance — useful for bridging a gap, less useful as a lifetime backstop.
Get a Free Quote →Registered vs Non-Registered: The Tax Difference Is Large
Where the money comes from changes how the income is taxed, and the gap is significant enough to change the decision.
Registered annuities are bought with RRSP or RRIF money. Every dollar of income is fully taxable, exactly as an RRIF withdrawal would be. There is no tax advantage over simply drawing down the RRIF — the advantage is purely the lifetime guarantee.
Non-registered annuities can be structured as prescribed annuities, and this is where the product gets genuinely interesting. Under prescribed treatment, each payment is split into a return of your own capital (not taxable) and interest (taxable), and that split is levelled out evenly across the whole life of the contract. The practical result is a low, flat taxable amount every year instead of a front-loaded one.
For a retiree watching the Old Age Security clawback threshold or trying to preserve the Guaranteed Income Supplement, that low reported income can be worth more than the interest rate itself. It is one of the few genuinely elegant tax structures still available to ordinary Canadians.
Where Annuities Beat the Alternatives
An annuity solves one problem that no investment portfolio can solve: you do not know how long you will live. A drawdown plan has to be built around a guess. Guess too short and you run out; guess too long and you die with money you could have spent. An annuity removes the guess entirely for whatever portion of your assets you commit to it.
The situations where annuities tend to win:
- You have no defined benefit pension. If CPP and OAS are your only guaranteed lifetime income, an annuity manufactures the pension you never got.
- Longevity runs in your family. Annuities are priced on average lifespans. If you have strong reason to expect an above-average one, you are buying at a discount.
- You want to stop managing money. Cognitive decline is a real and under-discussed retirement risk. An annuity is the one income source that requires no decisions after purchase.
- Market volatility genuinely distresses you. There is real value in an income that does not move when markets do, even if a portfolio might have produced more on paper.
Where They Fall Short
Inflation. A level annuity purchased at 65 will feel considerably smaller at 85. Indexed annuities exist but the starting payment is materially lower, and most buyers find the trade unappetising at the point of sale. This is the single most underestimated risk in the product.
Liquidity. The capital is gone. If a roof, a health crisis, or an adult child's emergency arrives, that money is no longer available. Never annuitize money you might need in a lump.
Estate value. Beyond any guarantee period, there is nothing left for heirs. If leaving an estate is a priority, an annuity works against it — though some retirees deliberately pair an annuity with a small permanent life insurance policy to solve exactly this.
Rate timing. Buying the whole position on a single day locks you to that day's rates. Splitting the purchase into two or three tranches over a few years spreads that risk, in the same way as dollar-cost averaging.
How Much of Your Portfolio Should Go In?
Almost nobody should annuitize everything. The common approach among Canadian planners is the floor-and-upside model: add up your non-negotiable annual expenses — housing, food, utilities, insurance, transportation — and subtract what CPP and OAS already cover. Whatever gap remains is the amount worth considering covering with an annuity. Everything above that stays invested for growth, flexibility, and the estate.
In practice that usually lands somewhere between 20% and 40% of retirement assets for someone without a workplace pension, and often zero for someone with a solid defined benefit plan who already has a guaranteed floor.
Deferring: ALDAs and Later-Life Income
A more recent option is the Advanced Life Deferred Annuity, which lets you move a portion of RRSP or RRIF money into an annuity that does not start paying until as late as age 85. Because payments are deferred so far out, a relatively modest deposit buys a substantial later-life income, and the amount moved into the ALDA is excluded from the RRIF minimum withdrawal calculation in the meantime.
There are lifetime and percentage caps on how much can go into one, and they are not offered by every insurer. But as a pure hedge against living to 95 — while keeping the rest of your money liquid and invested through your 70s — it is the most efficient tool currently available.
What Protects Your Payments
Annuities are insurance contracts, so they carry insurer credit risk rather than market risk. Canadian annuity holders are backed by Assuris, the industry-funded protection organisation that steps in if a member life insurer fails. Assuris protection for monthly annuity income covers the higher of a set monthly threshold or a large majority percentage of the promised payment, which means a typical retiree's annuity income would be substantially or fully protected. Confirm current limits before committing an unusually large deposit, and consider splitting a very large purchase across two insurers.
The Bottom Line
Annuities are not an investment and should not be judged like one. Comparing an annuity's "return" to a balanced portfolio misses the point — you are not buying a return, you are buying the elimination of a risk. For a retiree with no pension, real longevity in the family, and a genuine fear of running out, converting a slice of the portfolio into guaranteed lifetime income is one of the few decisions in retirement planning that cannot go wrong in hindsight.
Get quotes from several insurers on the same day — payouts for identical contracts vary more between companies than most people expect — and never commit money you might need back.
Frequently Asked Questions
How much income does a $100,000 annuity pay in Canada?
It depends almost entirely on your age, sex, and the interest rate environment on the day you buy. A 65-year-old will receive meaningfully less per month than a 75-year-old buying the identical contract, because the insurer expects to pay the older buyer for fewer years. Adding a guarantee period or a survivor benefit reduces the payment further. Always request same-day quotes from several insurers, because pricing for identical contracts varies more between companies than people expect.
Is annuity income taxable in Canada?
Yes, but how much is taxable depends on the source of the money. An annuity bought with RRSP or RRIF funds is fully taxable, exactly like an RRIF withdrawal. An annuity bought with non-registered money can be set up as a prescribed annuity, where only the interest portion is taxable and that portion is spread evenly across the life of the contract. Prescribed treatment produces a much lower reported income, which can help retirees stay under the OAS clawback threshold.
Can I cancel an annuity after I buy it?
In almost all cases, no. Once the contract is issued the capital belongs to the insurer and the payment schedule is fixed. A small number of contracts offer limited commutation rights, but they are the exception and they cost income to include. This is why the standard advice is to never annuitize money you might need as a lump sum for a roof, a health crisis, or a family emergency.
What happens to my annuity when I die?
That depends on the structure you chose. With a straight life annuity, payments simply stop and the insurer keeps the balance. With a guarantee period, any payments remaining in that period go to your named beneficiary or estate. With a joint and survivor annuity, payments continue to your spouse at whatever percentage you selected, until they die as well. Most Canadian buyers add a 10-year guarantee specifically to avoid the worst-case outcome of dying shortly after purchase.
Are annuities safe if the insurance company fails?
Canadian annuity holders are protected by Assuris, an industry-funded organisation that steps in when a member life insurer becomes insolvent. Its protection for monthly annuity income covers the higher of a set monthly threshold or a large majority of the promised payment, which means a typical retiree's income would be substantially or fully protected. If you are placing an unusually large deposit, confirm the current limits and consider splitting the purchase between two insurers.
