Pension Income Option One: Life Annuities
Until the early 1990s, the life annuity was the most common, and to a large extent the only, option for commencing income from a pension plan or locked-in asset. A life annuity is a stream of future payments composed of a combination of principal and interest.
Think of an annuity as a loan in reverse. When you borrow money, you arrange a repayment schedule of so much per month until the principal and interest are completely paid off. With a life annuity, instead of borrowing capital, you are lending your pension plan value to the institution or plan trustees. They repay you on a monthly basis. That is your pension income. Instead of a set period of time for repayment, as you are used to when you borrow money, the income schedule for a life annuity is based upon average life expectancy. Some individuals pass away before average life expectancy and “subsidize” the payments for those people who live longer than the average.
When you leave your employment, your pension may commence immediately or you may elect to defer it to start at a later time. Why would someone choose to defer it? Not everyone leaves their formal employment and enters into full retirement. There may be a period of transition in another employment role where you don’t want to have pension income in addition to employment income. There will also be an increase in the amount of income that the pension will provide if it does not start for several years.
Remember that ...