Page 232 - A Canuck's Guide to Financial Literacy 2020

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Fixed Payments

The annuity payments may be fixed or variable. A fixed annuity payment would be received
for the duration of the annuity, no matter if interest rates rise or fall. The payment would stay
fixed throughout the lifetime of the annuity.

Variable Payments

Annuity payments may also be variable meaning that they may be tied to an underlying
index or mechanism. For example, a variable annuity may link itself to inflation. As inflation
increases each year, the payment would increase as well.

Advantage of Annuities

• Easy to Understand - Annuities and the term of annuities are easy to comprehend.
An individual who would need a stream of income would sign a contract with an
annuity provider detailing the payment, rate and the duration.
• Steady Stream of Income - Annuities provide a steady stream of income that could
supplement your CPP, OAS, GIS payments.
• Choice - Annuities provide flexibility and choice. You can choose from a fixed or
variable annuity and choice in payment frequency which can be monthly, quarterly,
semi-annually or annually.
• Managed - An annuity can give you a piece of mind knowing that you don't have to
make any investment decisions or monitor the performance of the annuity.
• Creditor Protection - Annuities may be protected against creditors or financial claims
when a specific beneficiary is named on the contract rather than the estate.
• Estate Planning Benefits - By naming a beneficiary on an annuity, it bypasses the
estate and allows you to save probate fees.

Disadvantages of Annuities

• Lack of Flexibility - Once an annuity contract is signed, changes cannot be made.
• Interest Rate Risk - Annuities may be sensitive to interest rates. As the interest rates
rise, the annuity payment may be based on the lower annuity rate.
• Penalties - If a contract holder wishes to surrender the annuity contract, then they
may face penalties.

Types of Annuities

The two main types of annuities are either a payout annuity or an accumulation annuity. A
payout annuity pays an income while a accumulation annuity, is set up for the accumulation
of income for the purpose of growth.