Didn't miss out much from the Saskatchewan Pension Plan | Page 2 | General financial discussion | Discussion forum

The SPP quote mentioned is

• Life annuity (no spouse)
• Male, almost 60
• SPP balance of $100,000
• about $472 per month

I don't agree with comparing the SPP annuity to life annuities with 10-year minimum guarantee unless the SPP annuity also guarantees a minimum of 10 years worth of payments. Also, it is not clear whether the insurance company rates from Cannex are for registered or unregistered funds.

The SPP rate is okay. From the Globe & Mail annuity rates survey, life annuities for

• single male,
• age 60,
• no minimum guarantee, and
• $100,000 registered funds

are currently from $453.52 to $478.63 per month.

christinad said
Good point. It is difficult to compare when the products aren't the same. However, I also believe there may even be more commission on top of the annuity amount bought from the bank or insurance company. …

Edit According to someone on financial wisdom forum, the commissions are included in the monthly quote.  

That is my understanding as well: The income quoted by the agent selling the annuity is already reduced by whatever commission the insurance company will pay the agent.

GIC brokers have the discretion to reduce their commission in order to offer a GIC with a higher rate. I suspect that annuity agents can do the same.

Life annuities are not that popular because their returns don't seem to be outstanding.

The best rate for $100,000 of registered funds was $478.63/month for a 60 year old single male. According to StatsCan, the latest life expectancy of a 60 year old Canadian male is 23.3 years = 279.6 months.

$100,000 up front. 280 expected monthly payments of $478.63. Zero at the end. That means an expected return of about 2.64% per annum.

Monthly payout is higher. But, surprisingly, the return is worst at age 75!

Currently, the best life annuity rate for $100,000 of registered funds for a 75 year old male is $751.96/month. StatsCan life expectancy of a 75 year old male is 12.0 years = 144 months.

$100,000 up front. 144 expected monthly payments of $751.96. Zero at the end. That means an expected return of about 1.34% per annum.

The return is worst for non-registered money!

Best rate for $100,000 non-registered funds for 75 year old is $712.66/month.

$100,000 non-registered up front. 144 expected monthly payments of $712.66. Zero at the end. That means an expected return of about 0.43% per annum.

The premium paid is not kept in a separate account for each annuitant. There is a separate legal contract for each annuitant's payments for life. But, the premiums are put into an annuity pool with those of other annuitants.

I suspect the insurance company is taxed on the performance of the annuity pool and not on the performance of each annuity contract.

As for the lower rate of return for the older annuitant, I think part of it is the rate on the government bonds that the premium is invested in. Shorter life expectancy means shorter investment horizon and investing the premium in shorter term bonds with lower interest rate.

The rate is probably affected also by each insurance company's short-term funding needs, like the rates offered for GIC's.

Yes, the insurance company does pool it all together like a pension plan does.

Not bonds for each individual annuitant. But, bonds, T-bills, and strips for each of the expected monthly, quarterly, and annual batches of payments to the annuitants in the pool.

Adding a new annuitant to the pool, who is expected to be paid $751.96/month for the next 12 years, will require the insurance company to add multiple bonds, T-bills, and strip bonds to the pool to support those additional monthly payouts.