Definition of Annuity Commencement Date

It marks the transition from the accumulation phase to the payout phase in an annuity contract.

In Canada, annuitants can choose immediate or deferred annuities, with payments beginning at different times depending on financial goals and retirement plans.

For example, a retiree purchasing a life annuity at age 65 may set the annuity commencement date for their 66th birthday to start receiving income.

Purpose of the Annuity Commencement Date in Retirement Planning

Selecting the right annuity commencement date is essential for the following:

1. Ensuring Steady Retirement Income – Aligning payments with financial needs.
2. Maximizing Investment Growth – Allowing deferred annuities to grow tax-free.
3. Optimizing Tax Efficiency – Managing income taxes under Canada Revenue Agency (CRA) regulations.
4. Coordinating with Other Retirement Benefits – Timing payments alongside RRSP withdrawals and CPP benefits.
5. Minimizing Longevity Risk – Preventing retirees from outliving their savings.

How the Annuity Commencement Date Works

1. Selecting a Start Date

The annuitant chooses a start date based on financial needs and retirement goals.

Example: A Canadian retiree defers annuity payments until age 70 to receive higher monthly payments.

2. Transitioning from Accumulation to Payout Phase

• Accumulation Phase – Funds grow tax-deferred before withdrawals begin.
• Payout Phase – The annuitant starts receiving fixed or variable income payments.

Example: A deferred annuity accumulates interest for 10 years before payments begin.

3. Impact on Payment Amounts

The later the commencement date, the higher the monthly payouts, as the payment period is shorter.

Example: A $200,000 annuity that starts at age 60 provides $1,000 per month, but the payout increases to $1,500 at age 70.

Factors Affecting the Annuity Commencement Date

1. Age of the Annuitant

Older annuitants receive higher payments due to shorter life expectancy.

Example: A 75-year-old annuitant receives larger payouts than a 65-year-old.

2. Type of Annuity

• Immediate annuities start payments right after purchase.
• Deferred annuities start payments at a future date, allowing tax-deferred growth.

Example: A deferred annuity purchased at 55 with payments starting at 65 provides higher payouts than an immediate annuity.

3. Interest Rates at the Time of Purchase

Higher interest rates lead to higher annuity payments.

Example: If interest rates rise by 2%, annuity payouts increase accordingly.

4. Tax Considerations

• Registered annuities (RRSP, RRIF annuities) are fully taxable upon withdrawal.
• Non-registered annuities have tax-efficient withdrawals, where only the interest portion is taxable.

Example: A non-registered annuity starting at age 70 may provide tax advantages compared to an RRSP annuity.

Annuity Commencement Date vs. Maturity Date

Category	Annuity Commencement Date	Annuity Maturity Date
Definition	The date when annuity payments begin	The date when a deferred annuity must start paying out
Timing	Chosen by the annuitant	Defined by contract terms
Example	A retiree chooses to begin payments at age 67	A deferred annuity has a mandatory payout age of 71

For example, a Canadian RRSP annuity must begin by December 31 of the year the annuitant turns 71.

Tax Implications of the Annuity Commencement Date in Canada

1. Mandatory Conversion of RRSPs to RRIFs or Annuities

By age 71, all RRSP funds must be converted into a Registered Retirement Income Fund (RRIF) or an annuity.

Example: A 72-year-old cannot defer RRSP annuity payments under CRA rules.

2. Taxable vs. Non-Taxable Annuity Income

• Registered annuities (RRSPs, RRIFs) are fully taxable.
• Non-registered annuities offer tax-efficient income due to the return-of-capital portion.

Example: A $3,000 RRIF annuity withdrawal is fully taxable, while a non-registered annuity may only have a $1,500 taxable portion.

3. Pension Income Tax Credit

Retirees aged 65+ can claim a $2,000 annual tax credit on eligible annuity income.

Advantages and Disadvantages of Choosing an Annuity Commencement Date

Advantages

• Allows Flexible Retirement Planning – Payments can start based on financial needs.
• Maximizes Retirement Income – Delayed commencement increases monthly payouts.
• Ensures Tax Efficiency – Helps reduce taxable income through timing strategies.

Disadvantages

• Fixed Payments Once Annuitized – No lump sum withdrawals after the commencement date.
• Limited Liquidity – Funds are locked into structured payments.
• Inflation Risk – Fixed annuities may lose purchasing power over time.

Related Terms

• Annuitization: The process of converting a lump sum into scheduled payments.
• Deferred Annuities: Annuities that start payments at a future date.
• Registered Retirement Income Fund (RRIF): A retirement account requiring mandatory withdrawals after age 71.

Interesting Fact

Did you know? Most Canadian annuitants begin receiving payments between ages 65 and 70, as later annuitization results in higher monthly income.

Statistic

According to Statistics Canada, over 55% of Canadian retirees choose to start annuity payments at or after age 65, maximizing their monthly payouts.

Frequently Asked Questions (FAQ)

1. When should I start my annuity payments?

It depends on financial needs, retirement goals, and tax considerations. Many Canadians delay payments until age 70 to maximize payouts.

2. Can I change my annuity commencement date after purchase?

No, the date is fixed once set unless the annuity contract offers flexibility.

3. Does the commencement date affect payment amounts?

Yes, delayed payments result in higher monthly income, while earlier payments lead to lower payouts.

4. What happens if I don’t choose a commencement date?

For registered annuities, payments must begin by age 71 under CRA rules.

5. Can I receive annuity income while still working?

Yes, but annuity income is taxable and could impact Old Age Security (OAS) benefits if income exceeds the threshold.