|What is the pension made from?
To create your pension we will purchase a form of annuity from one or more of the largest insurance companies in the world.
Many large companies in Canada create defined benefit pensions exactly the same way for retiring employees. In this fashion, we will create one for you.
An annuity is an insurance product, whereby you give a lumpsum of money to an insurance company and they commit to pay you a monthly payment for life. This contract cannot be cancelled, it cannot be changed once it is established and it is insured to protect against financial problems with the insurance company.
Annuities come with various features - many of which you can choose to include or exclude from your pension design.
Inflation protection – you can choose to have your pension payments increase by an inflation factor each year.
Guarantee period – If you die prematurely (e.g. the day after you buy the pension) adding a guarantee period to your pension ensures that your estate will continue to get value from the pension. Guarantee periods can be attached to your pension that guarantee payments will continue from the pension for 1,5,10,15 or 20 years from the date of purchase. This ensures that your heirs will benefit from the pension should you not live a long life.
Joint and last to die – this type of annuity pays a pension until the death of the last surviving spouse. This form of pension is the most common type with couples who want to ensure an income exists until they are both gone.
Term annuity – this type of annuity makes pension payments to you for a set number of years only. This type of annuity would only be used for a specific need.
Life annuity –the most basic form of annuity, it is designed for one person. The monthly pension payments are maximized because there is no spouse or heirs to also provide for.
Prescribed annuity – the prescribed form refers to tax advantages for this type of annuity. A prescribed annuity levels the mixture of principal and interest that you receive in your monthly pension payment to minimize taxes evenly over your life. This can be greatly tax advantageous for pensions purchased using non-registered money, where it is not uncommon for an individual to pay half as much tax as they otherwise would. Prescribed annuities can be a powerful tax reduction tool for cash flow in retirement.