Oct 5, 2026
The Case for Annuities in 2026
For many Canadians, retirement planning is no longer simply about building the largest possible investment portfolio. It is also about creating a reliable income stream that can cover essential expenses for as long as retirement lasts. That is one reason annuities are receiving renewed attention in Canada in 2026. Higher interest rates in recent years have improved annuity pricing, while the decline of traditional defined benefit pension plans has left more Canadians responsible for creating their own source of guaranteed retirement income.
Annuities were once a much more common part of the retirement conversation. In the early years of the Registered Retirement Savings Plan (RRSP), Canadians approaching age 71 generally had to choose between taking their retirement savings as cash or purchasing an annuity. The introduction of the Registered Retirement Income Fund (RRIF) in 1978 changed that equation. Retirees gained another option: they could keep their savings invested and withdraw amounts subject to minimum withdrawal rules. As a result, annuities became less central to retirement planning. But changing pension coverage, longer retirements and the interest-rate environment have brought them back into the conversation.
Why Annuities Are Getting More Attention
The decline of defined benefit pension plans is one of the biggest reasons guaranteed retirement income has become more important. Statistics Canada data shows that roughly one-quarter of paid workers contributed to a defined benefit pension plan in 2024, compared with much higher coverage levels during the peak of workplace pension plans in the 1970s. For workers without a traditional pension, retirement income may come primarily from government programs such as the Canada Pension Plan (CPP) and Old Age Security (OAS), combined with personal savings and investments. That can leave retirees responsible for managing several risks at once: investment market volatility, inflation, longevity and the possibility of spending too quickly. An annuity can address one part of that equation by converting a lump sum into a predictable income stream.
There are several types of annuities, and they do not all work the same way. A life annuity can provide income for the remainder of the purchaser’s life. A term-certain annuity provides payments for a predetermined period. Variable annuities can combine guaranteed income features with a component linked to the performance of underlying investments. The right structure depends on the individual’s retirement income needs, financial situation and preferences.
Interest Rates Can Affect Annuity Income
Interest rates are another important factor when considering annuities. Annuity pricing is influenced by prevailing interest rates, among other factors. When rates were extremely low following the 2008 financial crisis, annuity payouts became less attractive to many consumers. The Bank of Canada’s overnight rate remained at or below 1% for much of the decade following the financial crisis. During the COVID-19 pandemic, the policy rate was reduced to 0.25% and remained there for almost two years.
The subsequent increase in interest rates helped improve the economics of many annuity products and contributed to renewed consumer interest. However, interest rates should not be the only consideration. An annuity is ultimately a retirement-income decision, not simply an interest-rate decision. Someone who needs predictable income to cover essential expenses may find an annuity useful even when interest rates are different from today’s levels. Factors such as age, health, other sources of retirement income, investment risk tolerance and estate-planning objectives can all influence whether an annuity fits into a retirement strategy.
Using an Annuity to Cover Essential Expenses
One practical way to think about an annuity is to focus on the income gap rather than the size of the investment portfolio. A retiree can first estimate their essential monthly expenses, including housing, groceries, utilities, transportation and other recurring costs. They can then consider how much of those expenses are already covered by reliable sources of income such as CPP and OAS. The remaining gap may help determine whether purchasing an annuity makes sense.
For example, imagine a retiree expects to need $4,000 per month for essential expenses. If CPP, OAS and other reliable income provide $2,800 per month, there is a $1,200 monthly gap. Rather than automatically annuitizing a large percentage of their entire retirement portfolio, the retiree could evaluate whether an annuity could cover some or all of that specific income shortfall. This approach can also make the decision easier to understand. Instead of asking, “How much of my portfolio should I put into an annuity?” the question becomes, “How much guaranteed income do I need to cover the expenses I cannot afford to miss?”
The Trade-Off Between Income and Flexibility
One of the most important considerations is that purchasing an annuity involves a trade-off. An annuity can provide predictable income and reduce the need to manage investments for every dollar of retirement spending. However, once an annuity is purchased, the underlying capital generally cannot be accessed in the same way as money held in a savings or investment account. This can be particularly important for retirees who value flexibility or want to leave a substantial inheritance.
There is also a common concern about what happens if the purchaser dies relatively soon after buying an annuity. Some annuity products can be structured with features designed to address this concern. Depending on the product, retirees may be able to choose options such as joint-life coverage, guaranteed payment periods or provisions that provide benefits to an estate or beneficiaries. These features can provide additional protection, but they usually come at a cost. Adding guarantees or other benefits can reduce the amount of income available during the purchaser’s lifetime. That means customization should be approached carefully.
Joint Annuities and Estate Protection
For couples, a joint-life annuity can provide another way to manage longevity risk. Rather than payments ending when the first spouse dies, a joint annuity can be structured so that income continues while both spouses are alive and, depending on the contract, potentially continues after one spouse dies. Other features can provide payments for a guaranteed period even if the purchaser dies earlier than expected. Inflation protection may also be available with some products. This can help address the risk that a fixed retirement income loses purchasing power over time. However, protection comes with a price. The more additional guarantees and features included in an annuity contract, the lower the income may be compared with a simpler product.The goal is therefore not necessarily to add every available feature. Instead, retirees should determine which risks they actually need the annuity to address.
Annuities Are Not Right for Every Retiree
Despite their potential benefits, annuities should not automatically replace other retirement-income strategies. A retiree with substantial guaranteed income from a workplace pension, CPP and other sources may have less need for additional guaranteed income. On the other hand, someone with limited pension income may place greater value on having a predictable monthly payment that continues throughout retirement.
Health and life expectancy can also influence the decision. Because lifetime annuities pool longevity risk among many policyholders, the value of the arrangement depends partly on how long the income is ultimately received. Investment preferences matter as well. Someone who is comfortable with market volatility and wants greater access to their capital may prefer to keep more money invested. Someone who prioritizes predictable income may place greater value on transferring some longevity and investment risk to an insurer. There is no single retirement-income strategy that works for every Canadian.
A Different Way to Think About Retirement Savings
For decades, retirement planning often focused heavily on accumulating assets. But once retirement begins, the question changes. Instead of asking only how much has been saved, retirees also need to consider how those savings will be converted into sustainable income. An annuity is one tool that can help address that challenge. It can transform part of a retirement portfolio from an asset that must be actively managed into a source of predictable income.
For Canadians who do not have access to a traditional defined benefit pension, this can be particularly relevant. At the same time, an annuity represents a significant financial commitment. Understanding the contract, available guarantees, fees, payment structure, inflation considerations and implications for beneficiaries is essential before making a decision.
Building a Retirement Income Strategy
The renewed interest in annuities in 2026 does not mean every Canadian should purchase one. Instead, it highlights the importance of looking beyond investment returns when planning for retirement. A balanced retirement-income strategy may involve several sources: government benefits, employer pensions, RRSPs, RRIFs, TFSAs, non-registered investments and, where appropriate, annuity income.
The objective is to match each source of income with a specific retirement need. For some retirees, an annuity may provide an important layer of financial certainty. For others, maintaining access to their savings may be more important. Before purchasing an annuity, Canadians should consider their expected expenses, other sources of guaranteed income, health and longevity considerations, investment preferences, tax situation and estate-planning goals.
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Retirement planning is about more than choosing investments. It is about making sure your income strategy supports the lifestyle and financial security you want throughout retirement. If you’re considering an annuity or reviewing your broader retirement and insurance needs, speaking with an insurance professional can help you understand the available options and how they may fit into your financial plan.
Get a Quote from Bonjour Assurance today and explore your insurance and retirement-income options with confidence.
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