Lately, I’ve been receiving a few questions regarding annuities.  As I only have a basic understanding of annuities , I emailed Brian Poncelet (CFP and insurance specialist) to provide more details on on the types of annuities.  For those of you fresh to the concept, investors who purchase an annuity would pay a lump sum to an insurance company and receive a cash flow stream for the rest of their lives.

Short history

The ancient Romans issued contracts called an “annua” that promised an individual a stream of income for life. Roman citizens would make a one-time payment to the annua, in exchange for lifetime payments made once a year.

In North America, annuities have been around for over 200 years. The average purchase age appears to be the mid sixties. Annuities are purchased for various reasons but most commonly for peace of mind and tax benefits. Others may look to buy an annuity when they receive a lump sum inheritance.

Annuity payments consists of both principal and interest. This interest is taxable but is spread over the life of the annuity, therefore the tax is deferred. While your other sources of income (GIC’s, stocks, mutual funds) may eventually be depleted, you cannot outlive your annuity income. Life annuities pay a lifetime of income.

Types of Annuities

• Term
• Term Certain Annuities
• Life Annuities
• Prescribed Annuities
• Indexing

Term Certain:

Fixed payment for a fixed period. If annuitant dies during the guarantee period the beneficiaries(s) receive the income payments.

Life Annuities

As the name suggests, life annuities offer guaranteed regular income for the rest of your life. The annuitant will not run out of money but if he/she dies early, there is no refund.

Joint Life Annuities

The annuity is purchased on 2 lives, issued with or without a guarantee period. They may be sold as Reducing or Non-Reducing annuities. At the first death (or death of the primary annuitant), the surviving annuitant receives a reduced periodic income. If the Reducing Annuity has a guarantee period, the reduction in periodic income would occur after both events have occurred (the death of one of the annuitants and the expiration of the guarantee period). The terms of the guarantee period are usually based on the age of the youngest annuitant.

Variable Annuity

With typical annuities, the periodic income paid to an annuitant is predetermined, consisting of principal and interest. The interest was determined at the time of purchase and does not change.

With variable annuities the payment can vary because the interest piece is based on the stock market. However most do offer a minimum rate of interest for every year that the annuity remains untouched.

This annuity is like the Manulife Income Plus. In a bear market this does not look so bad. However in a bull market this is expensive. A variable annuity should be bought and thought of as a pension purchased for the long term.

Therefore, it the purchaser is seeking immediate income payout, it is best to avoid variable annuities.

Prescribed vs Non-prescribed Annuities (non-reg only)

Non-prescribed Annuity: taxes payable on the income earned are higher in the early years of payments but gradually decrease to zero over time.

Prescribed Annuity: the taxes payable on the income earned are paid evenly throughout the term of the contract.

How is my annuity income determined?

1. Current interest rates
2. Male vs. Female: a female annuitant is expected to live longer than a male annuitant of the same age. She will received a smaller periodic payment because the insurance company assumes that they will have to pay the periodic income for a longer period than for the similar male life.
3. Number of years you want payments guaranteed: the longer the payment period, the smaller the periodic payments.

Insured Annuity

A life income annuity (payable until death) is attractive because the insurance company has to pay for life, even if you live to 110. However if you die much earlier than you expect, the insurance company keeps all of the money. Rather than gamble with your family’s inheritance, consider purchasing an insured annuity. This is a 2 step process where the annuity is backed by a life insurance policy for the same amount. If you die early, the life insurance is paid to your beneficiary tax free.

Back to Back Annuity (insured annuity)
This example compares GIC vs a life annuity with a matching life insurance policy.

Example:

• Current GIC rate 3.25% (five year rate lock-in)
• 65 year old male purchases $100,000 non-reg annuity and $100,000 life insurance policy
• Tax bracket 31.41% ($40,970 up to $65,345) Ontario

After taxes are considered, a GIC of over 6% is needed to equal the annuity. At higher tax brackets, a GIC paying over 8% is needed! Also, under the annuity strategy, he pays less tax as he is showing less taxable income and is less susceptible to OAS claw backs and age amount (age 65) claw back. This could mean many hundreds or thousands of dollars saved every year.

Currently interest rates are low, but because the way annuities are taxed, they will always pay a higher income than GIC’s at higher rates.

Early Planning is Best

To lower the insurance premium required to cover the annuity and to get an even higher rate of return, permanent insurance should be considered at a much earlier age (and better health) if cash flow permits. Or to give more options in retirement, such as selling the house in retirement and living off the capital. Insurance fills the hole after the money is spent.

Example:

An individual who plans well for their future, could buy a 20 pay life (paid for 20 years) insurance policy at $2700 per year (age 40). The insurance coverage would start at $100,000 and would be worth $215,000 by age 65 and have a cash value of $108,000. Not only would this insurance more than cover the annuity purchase at 65, but the individual would have access to the cash value at age 65. This allows for more options for a comfortable retirement.

Brian Poncelet who is an insurance specialist and independent certified financial planner (CFP) working in the financial services industry since 1994. Along with insurance, Brian Poncelet focuses on mortgage and retirement planning.

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Changing jobs can be an extremely stressful time. It can also be a great transition with better opportunities for growth. There are certain things you can do to make the transition go as smoothly as possible. Some things are out of your control. Others may need some work to manage well.

Jobs like relationships, are sometimes difficult to end. When things aren’t working out, it may be time to move on. Sharing that news with your supervisor has the potential to get messy, especially if the news comes as a surprise. If like me, you have multiple supervisors, it can go both ways.

Keep it Simple

When writing a formal letter of resignation, it can be temping to give reasons and for some, those reasons can be laced with resentment and negativity. An exit interview, if you are given the opportunity, is the better time to gently share your true reasons for leaving. Your resignation letter just needs the basics.

Date

Dear ____________,

Please accept my resignation from (insert company name and position here) effective (insert date here).

Thank-you for __________. (Ideas might include, 12 years of great service, many opportunities for professional growth, being a mentor for these past years. If you can’t think of anything nice to say, leave it at thank-you.)

Sincerely,

(your name)

Give appropriate notice

For many jobs, two weeks notice is appropriate. For other positions, you’ll need much longer than that. For part of my last job, I was an instructor for a two week course that ran 4 times a year. Giving two weeks notice would not have been enough time. Instead I timed the transition in such a way to give over 3 months notice for them to find someone else and train them for that role.

Keep your cool if things get messy

Like relationships, some bosses can take it personally when you decide to leave. In my case one supervisor was kind and gracious saying that I’d be missed but that he understood my situation. The other, not so much. He nearly went off the deep end. I didn’t take it as a compliment but rather confirmation I was doing the right thing by leaving. It took everything in me not to get defensive, especially after repeated conversations begging to me to stay and not accepting my resignation. Is that even possible when I had already secured another job?

He’s still calling me two months later, acting like a jealous ex-boyfriend using everything in his arsenal to try and get me back. I finally had to contact my other supervisor to explain the situation and ask that he stop contacting me. It was difficult to stay calm and not lose my temper when faced with an unreasonable and inappropriate response. Leaving well means rising above things and staying professional when things get ugly.

Tie Up Loose Ends

It can be difficult to focus in the those last few weeks. You’ve landed another job. You are looking forward to the next chapter in your life. You still have work to do at this job and need to tie up loose ends. This might include such things as:

• finishing up projects
• thanking helpful colleagues and great supervisors
• letting your clients know when you’ll be leaving and who’ll be replacing you
• tidying up your workspace
• completing your final expense reports

Train the next person

It’s nice to feel irreplaceable but when it comes to leaving well, someone else needs to know what you’ve been doing and how you’ve been doing it. They may find their own ways over time and change things up and that’s great too. What you don’t want is for people to wonder what you ever did or for the person coming in to have to re-create everything you took years to perfect. You won’t always have the time to train your replacement. In the time you’ve given notice, they need to hire someone else. Hiring can take time unless there is a natural opening for someone else in the office. If you can’t train the person directly, make sure you leave detailed notes or a training manual.

Final Thoughts

Some people don’t have the opportunity to leave well. Just recently my uncle, a middle manager with the government for over thirty years was called into the office, given ten minutes to gather his things and was escorted out the door with a non negotiable early retirement package. He hadn’t done anything wrong. It was just another round of impersonal middle management layoffs. There was no time to train someone else or to transition well. There wasn’t even time to process what happened. Fortunately he’d escaped the first few rounds of lay-offs so he knew the the potential was there. It still doesn’t make the transition to retirement any easier with you’ve only been given a ten minute warning.

When you are the one making the decision to leave for another job, it’s important to keep it professional. Even if you move to a completely different industry in another city, you’ll never know whose path you’ll cross again. You build your reputation over your career and the grace with which you transition jobs can be a great testament to your character not to mention future references you may need.

What is your advice on transitioning well from one job to another? Any lessons you learned the hard way?

Kathryn has been a staff writer for MDJ since January 2009. During the day she works in an office. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Kathryn, along with her husband and two children live in Ontario.

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