Segregated Funds

The sale of segregated funds (Seg Funds) in Canada is a huge area of growth. Segregated funds offer the benefits of participating in the returns of pools of funds like a mutual fund, but with extra guarantees to help mitigate your losses in down markets.

  • Maturity Guarantees – All Seg funds in Canada have a maturity guarantee attached to the contract. Often it is 75% of your deposits but can range up to 100%. 

  • With a maturity guarantee, an investor knows ahead of time that the worst they can do is have a percentage of their initial deposit after a given number of years.

    *Example – If you had invested $100,000 in a seg fund in January 1999, In January 2009 when the stock markets bottomed out, and investments were down 45%, the insurance company would top up your account so that you were only down 25%.  

  • Resets – All seg funds in Canada allow for client initiated resets. A reset locks in the current market value of the investment as the new initial deposit for use with a maturity guarantee. 

  • The time frames for amount of resets per year and how often they can be invoked depends largely on the insurance company. However, this is an extremely beneficial aspect of a segregated funds investment.

  • Having a reset allows the investor to permanently lock in gains in their market value for use with their maturity guarantee.

    *Example – Let’s assume in the situation as above; if you had invested that money in 1998 and received 10% growth that year and initiated a reset in January 1999. Your market value would have been $110,000. In January 2009 your account would be topped up to 75% of $110,000 instead of $100,000. 

  • Death Benefits – all seg funds investment contracts in Canada are actually considered an insurance policy. They are sold by an insurance company and as such can associate a death benefit with the investment. 

    • It does not work the same as a life insurance policy, where the death benefit greatly exceeds the premiums paid. It simply allows for a beneficiary to be named in the event of death of the investor. 

    • This is important because “The Last Will and Testament” of a person becomes public record at death. Named beneficiaries are never made public. 

    • In addition to keeping inheritance private, all funds that flow to a named    beneficiary by-pass probate. Thus reducing terminal taxes upon death.

 

Seg funds can be held in all forms of investment programs such as; 

  • Registered plans: Registered Savings Plans (RSP), Registered Retirement Income Funds (RRIF) and Registered Pension Plans (RPP) are a few.

  • Nonregistered Plans: Tax free savings accounts (TFSA), Defined contribution pensions, and Locked In Retirement Accounts (LIRA) are a few. 

 

The future of Seg Fund investments – Guaranteed Minimum Withdrawal Benefit (GMWB) plans

Whether you’re just beginning to think about retirement or you’re in the retirement phase of your life, there’s a lot to consider:

  • What if you experience poor market returns early in retirement?

  • Will you outlive your retirement income?

  • Will your retirement income keep pace with inflation?

 

These are very real concerns for all investors. How can we help them?

By investing in a segregated fund sold by a Canadian insurer you can now add an additional level of safety to your investment. Opting for a GWMB option at any point in your investment life cycle can provide huge benefits when you decide to retire. 

As you know by now Seg Funds have inherent guarantees and benefits already associated with them. However, when you open a GMWB account you also receive:

  • Guaranteed Bonuses – A simple interest bonus (usually 5%) is applied to your account every year that you do not make a withdrawal to go toward a guaranteed pension for you. 

  • Automatic resets –Every 3 years if the market value is up (not down) your bonuses and pension is recalculated based on current values. This helps drive up the value of your pension.  

  • Your guaranteed pension

    • Established immediately is your worst case scenario pension. Upon application you know the absolute worst outcome when you go to retire. (*No, it is not Zero)

    • Upon retirement an average yearly pension amount is calculated based on the higher of your market value and guaranteed pension.

    • Once you start to draw on your pension the yearly payments are guaranteed never to decrease even when your market value reaches zero. 

Notes
Segregated fund policies can be extremely complex and are often explained very poorly explained. If you find anything in this section of interest I would urge you to contact us to have someone explain the concepts to you.