An annuity is a contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. Annuities are designed to distribute the assets that have accumulated in an RRSP by providing a steady flow of income to the investor upon termination of the RRSP.
All annuities are tax-deferred, meaning that the holder is taxed only when they start taking distributions or if they withdraw funds from the account.
Types of Annuity
Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. Both are relatively safe, low-yielding investments.
An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.