Arguments Against Annuities - Connolly Report p 210 February 1990

For those who are being pestered by annuity agents, here are nineteen arguments designed to cool the eloquence of the most persuasive professionals. I have organized the ideas into a quasi-dialogue and substantiated many points with facts. At the same time, I tried to incorporate the many advantages of RRIFS. The list of twenty RRIF advantages in my August 1986 issue (page 126) is still valid.

  • Guarantee - You can't guarantee that I will get all my money back if I purchase a life annuity, can you?
  • Control - I lose control of my money if I purchase an annuity, don't I? I've worked hard and saved for years to accumulate these funds and I'm not about to relinquish control of them.
  • Rollover - As of 1990, I can no longer rollover extra income from an annuity into my RRSP, can I? Somehow it doesn't seem very wise to pay income tax at my rate on income that I don't need. If I invest that extra income I pay tax again on the interest it generates. A RRIF allows me to defer tax on funds I don't need just now.
  • Liquidity - It disturbs me that I can't access my money if circumstances change. There is no liquidity with an annuity, is there? I am locked in forever…even if I need money for a financial emergency or if there is a drastic change in economic conditions. Hyperinflation would devastate my situation, wouldn't it?
  • Call again - Come back and see me in ten years. You're right, life annuities seem terrific. But, I've studied the payout schedule on a standard RRIF and in less than ten years, at today's interest rates, my capital should be double what it is now. At that time (even after age 71) I can buy a life annuity. The annuity payout will be more than double because I'll be older and my deposit will be twice as big.
  • Fixed return - With an annuity I receive a fixed return. Right! Well, I expect that my regular expenses will keep rising during retirement. Inflation will persist. A fixed return could leave me destitute in little more than a decade. I * CAN'T RISK AN ANNUITY. Look what has happened to prices in just the last ten years. There's no way economic and personal circumstances will remain constant for the rest of my life. Sorry, a fixed return is just not appropriate. Well, yes, I do realize that indexed annuities are available, but I am not prepared to pay the price of the substantially reduced payouts. Income from an indexed annuity is 25% to 60% less than a regular annuity, depending upon the formula selected, isn't it?

Tax shelter - RRIF's are like RRSPs in that the earnings are not taxed…they accumulate on a tax free basis in the shelter. Income from an annuity is not sheltered from income tax, is it? C D Insurance - Funds ceded to an insurance company aren't covered by the Canada Deposit Insurance Corporation, are they? Monopoly - Insurance companies are the sole issuers of life annuities. Lack of competition can't be good for my rate of return. Women - Life annuities discriminate against women, Don't they. I noticed in a recent annuity table in a Toronto newspaper that the best monthly income on $50,000 was $544 for a male aged 65 and $499 for a female. There is no way I'm accepting $540 ($45 * 12) less each year because I am a woman. RRIFs do not discriminate this way. Wait - I've decide to wait, I have until age 71 to decide and I'm expecting interest rates to increase. Yes you are right., short term interest rates might decrease soon, but long term rates are increasing now. Annuity rates are based on long term rates, are they not? Fees - While I realize you have to make a living too and I do appreciate the advice you have given me, I object to paying someone to invest my money when I know for a fact I can purchase a RRIF without paying a front-end load. An extra $1,500 will be earning interest for me in your commission is the standard 3% on $50,000. Irrevocable - It bothers me that the annuity contract is so inflexible. Economic conditions change. It's just not prudent to lock my money in for the rest of my life. Yes, I remember that you mentioned cashable annuities. But the income beyond year one is NOT GUARANTEED for some of these new indexed annuities is it? Happy - I am quite comfortable with the RRSP I have now. Over the years my RRSP has provided a very good rate of return and the institution has provided excellent service. This company handles RRIFs. When the time comes, I will simply switch from an RRSP to a RRIF. I will retain the tax sheltering this way and avoid fees. Rate - Can you tell me the rate of interest I will be receiving on my money? I see. Every other investment I have ever made discloses the rate of return. Most financial institutions proudly advertise their interest rates. I think that the rate of return is important, don't you? Unbiased - I have decided to seek the counsel of a fee-for-service retirement planner for truly objective advice. (The commission on an annuity must be greater than the fee paid for selling a RRIF or this person would not be pestering me.) Pleasure - I happen to enjoy investing. It's a hobby for me. And I have become rather adept at it over the years. When I find I can no longer handle investment decisions, I'll switch to a guaranteed-type RRIF which will provide a certain income flow … an annuity, simply. Bonds - A substantial portion of an insurance company's portfolio is in bonds, right? How do I know that they are not investing in “junk” bonds?

NO Surrender - As I re-key this page in December of 2004, things have not changed much. For instance, the November 29 2004, issue of Forbes magazine had this to say about annuities: “Don't buy a variable annuity. If you already have. Don't switch it for another one.” The increased fees with the new annuity and the surrender charges will get you. In 2003, half of the $126 billion annuity sales were swaps. The two page Forbes article, No Surrender, is worth reading. It gave some examples mentioning Canada's own Manulife Financial. Here's an idea I just love from Yes You Can Time the Market by Stein and DeMuth: “If someone wants to sell you an annuity, consider it carefully for several years. Notice how eager they are for you to sign. Their commission will be large, while the possibility that it is really an appropriate investment vehicle for you can be small.” In The Dividend Growth Investment Strategy, Roxann Klugman has 12 pages on annuities. It's a good chapter. Apparently, annuities are the investment vehicle of choice for a large segment of the population. According to the Wall Street Journal, some $1.2 trillion were invested in annuities by the end of 1997 in the States. But annuities are sold, not bought. The commissions for the agent or broker are double that for selling a mutual fund with a front end load…in the order of 5% to 7%. It is telling that some 95% of people take a lump some instead of monthly payments at the time the payouts are to begin.

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