Annuities may be the best retirement product that hardly anyone buys. Like defined benefit pensions, they provide guaranteed income for as long as you live. An annuity is a contract with a life insurance company. You deposit a lump sum of money, and they agree to pay you a guaranteed income for a set period of time — or for the rest of your life. Annuities are most commonly used to generate retirement income.

You can buy an annuity with money from a RRSP, a RRIF or a Non-registered account.

The money is returned to you, with interest, in regular payments. You can choose to receive payments for a set number of years or for the rest of your life. You can receive monthly, quarterly, semi-annual or annual payments.

How annuity payments work

Your annuity income is calculated when you buy the annuity. It is affected by a number of factors — the most important are interest rates and how long you’re expected to live.

Once you buy an annuity, you can’t make any changes to it. Your regular payment amounts are locked in, and you can’t change them for any reason.

If you’re over age 65 and do not have a company pension plan, you may be able to claim the pension income tax credit. This means you won’t be taxed on the first $2,000 of annuity income each year.

• Term-certain annuity

A term-certain annuity gives you a guaranteed regular income for a set number of years (the term). Term-certain annuities bought with money from an RRSP or RRIF must extend to age 90. If you die before the end of the term, your payments will continue to go to your estate.

• Life annuity

A life annuity gives you a guaranteed regular income for life. Payments usually stop when you die, and no money will go to your estate. You may choose to add an option that allows your spouse, beneficiary or estate to continue to receive your payments after your death.

GMWB products are a type of annuity that provides guaranteed retirement income that can increase with investment gains in your portfolio and with certain bonus features.

If your annuity provider goes out of business, your annuity is insured up to certain limits. The first $2,000 per month of your annuity income is insured at 100%. Amounts above this are insured at 85% if the firm is a member of Assuris.

The insurance that covers your annuity is automatic. You don’t have to do anything, and you don’t have to pay anything extra to get it.

Compare annuity rates: Once you buy an annuity, your regular payments are locked in. You can’t change them for any reason. It’s worth shopping around to compare annuity rates.