Registered Retirement Income Funds vs. Annuities

It's important to know your options when it comes time to convert your registered retirement saving plan (RRSP).

RRSPs do a good job helping many Canadians build their next eggs, but they have a retirement age attached to them much like most of you and must be terminated by the end of the year in which the owner of the plan turns 71.

As a result, retirees are faced with a bit of a dilemma: Do you convert your RRSP into a Registered Retirement Income Fund (RRIF) or use the money saved in an RRSP to buy a life annuity from an insurance company?

Of course, there's nothing to say you can't do both and switch your RRSP into a combination that includes some parts RRIF and some parts annuity. But no matter what option you choose, it pays to be informed about the basic features of RRIFS and annuities in order to understand their potential strengths and weaknesses.

Registered Retirement Income Funds (RRIFs)

If you choose this option, your RRSP has to be converted to a RRIF no later than the year that you turn 71, however, you can make the switch at any time prior to that if you wish to start collecting a retirement income. 

Similar to an RRSP, investment income earned in a RRIF is tax deferred, but unlike an RRSP, new contributions to a RRIF are not allowed. Generally, only money already in a RRSP or existing RRIF may be transferred to a new RRIF.

RRIFs also require that a minimum amount be withdrawn each year, but you have the flexibility to take out more if desired.

It is your responsibility to choose the investments (GICs, stocks, bonds, ETFs) that go into a RRIF in order to ensure your retirement income needs are met over the long term. But if your investment returns fall short of expectations, there is a chance your RRIF will not last your lifetime.   

The value of your RRIF may be transferred upon death to a surviving spouse on a tax-deferred basis, but if there is no surviving spouse, the value of the RRIF is taxed on your final tax return, leaving an after-tax value to pass along to your beneficiaries.

Annuities

By turning your RRSP into an annuity, you are guaranteed a dependable regular income for life (life annuity) or for a specific period of time (term annuity).  

Responsibility for ensuring annuity payments is borne not by you but by the administrator of the plan (usually a life insurance company). In a low interest rate environment, income received from an annuity may be lower than when interest rates are higher.  

You are unable to withdraw extra money from an annuity and guaranteed payments only continue after death if you have a joint and last survivor annuity or guarantee period, both of which increase the likelihood that payments will continue for a longer period of time than a life annuity and will reduce your annuity income.