When you turn 71, your RRSP has to mature. And the maturity options include RRIF (Registered Retirement Income Fund) or an annuity. With a RRIF, you are forced to make withdrawals calculated using a special formula taking into account your age and your account balance. But you also have an option to withdraw more, or even everything as a lump sum. You can also decide how your money will be invested. The annuity option is different.

An annuity is an investment accounts which provides a guaranteed stream of income in exchange for a lump sum deposit. A life annuity guarantees income for as long as the investor (annuitant) is alive, while a term certain annuity provides income for a defined period of time, for example ten or twenty years. An annuity can be indexed to inflation or a certain index factor to protect you from the ever increasing cost of living. Annuities generate low return, as most guaranteed investments do, but because of the way annuity income is taxed, your after tax income may be quite high compared to other alternatives. The bulk of your income is treated as return of capital, which is not taxable, and only a small portion is treated as taxable interest. This may increase your net cash flow dramatically, especially if you are in a high tax bracket.

The problem with rolling an RRSP into an annuity is that the money will keep its registered status, which means that you will get a registered annuity. Unlike with regular annuities, income from registered annuities is taxed 100 per cent. Therefore, you can’t take advantage of tax deferral - the most attractive feature of a regular annuity. And that makes a registered annuity not so attractive from the net income standpoint. If you chose to roll your RRSP into an annuity, your return will likely be lower than any other investment you can chose.

But a major benefit of doing it is that you guarantee your income for life. A market downturn won’t affect you, a rush decision to buy a powerboat won’t deplete your RRIF, and if you happen to live to the age of 120, you won’t run out of money. A life annuity guarantees income for life and gives you a certain level of comfort.

A downside of the annuity option, in addition to the low return, is that you lose access to your capital, which you may need in case of an emergency of a major life changing event.

The best advice here, like with any investment decisions, is not to keep all the eggs in one basket. Put a sufficient amount in an annuity to guarantee yourself a certain minimum level of income for life, and play with the rest.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.