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How annuities work in Canada

An annuity can also be considered to replace part of an investor’s fixed income allocation within their portfolio. Or to cover some or all of a retiree’s fixed expenses along with Canada Pension Plan (CPP), Old Age Security (OAS), and workplace defined benefit pension income, with investments used for variable expenses.

Are annuity payments protected?

Most insurance companies in Canada are members of the not-for-profit organization Assuris, which protects policyholders in the event a member company fails. Annuity payments are guaranteed up to $5,000 per month or 90% of the monthly benefit, whichever is greater.

As an example, a $5,000 monthly annuity payment would be fully guaranteed if a member provider failed. A $6,000 monthly benefit would have $5,400—90% of $6,000—as the protected benefit amount. Prior to May 29, 2023, the Assuris guarantee was only $2,000 or 85% of an annuity payment.

Minimum investment requirements and fees for annuities

The minimum investment to purchase an annuity may range from $10,000 to $50,000, depending on the insurance company. A financial advisor needs to have a life insurance license to sell annuities. Their one-time commission is typically 1% to 3% of the total annuity purchase. By comparison, investment management fees are typically 1% to 3% of the assets under management every year.

Can you insure an annuity?

One of the biggest hesitancies to buying an annuity is the potential of dying soon after buying it, having handed over a lump sum to an insurance company. Adding a guarantee rider with a minimum number of payments payable to your beneficiaries or your estate is an indirect way to buy a life insurance policy on an annuity.

Some annuity holders take things a step further by buying a life insurance policy at the same time as buying an annuity—a concept called an insured annuity. If you buy a life insurance policy with a face value equal to the amount of money used to buy the annuity, it is similar to buying a guaranteed investment certificate (GIC). Both have regular payments and a principal guarantee (albeit on death for an insured annuity).

What are advanced life deferred annuities?

Advanced life deferred annuities (ALDAs) were proposed in the 2019 federal budget and received royal assent in 2021. An ALDA would allow an RRSP/RRIF holder to take up to 25% of their account, to a maximum of $160,000 as of 2023, and buy a deferred annuity to begin no later than age 85. The problem is no insurance companies are offering ALDAs yet.

Annuities: The non-pensioner’s pension

In closing, annuities provide an opportunity to a non-pensioner to buy a pension plan. Annuity income can insure a retiree against outliving their money. Annuities may appeal to DIY investors who are getting older or who don’t have a workplace defined benefit pension, and conservative investors may find them more attractive than stocks and bonds. They may also interest investors with smaller savings who have difficulty meeting the minimum investment requirements of an investment advisor.


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