Investments

Segregated Funds

A different kind of investment.

The sale of segregated funds (Seg Funds) in Canada is a huge area of growth. Seg funds offer the benefits of participating in the returns of pools of funds like a mutual fund — but with extra guarantees to help mitigate losses in down markets. Here's how they work.

01

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% — because of the 75% guarantee.
        

02

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 — which also locks in your new 75% guarantee amount at the higher value. This allows the investor to permanently lock in gains in their market value for use with their maturity guarantee.

03

Time Frame

The time frame for resets — how many 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. It allows you to strategically reset the guarantees when the market favours your investment.

          Example: If you had invested that money in 1998 and received 10% growth that year, then initiated a reset in January 1999, your market value would have been $110,000. During the big market drop in January 2009, your account would be topped up to 75% of $110,000 instead of $100,000.
        

04

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 premiums paid. It simply allows a beneficiary to be named in the event of death.
This is important because a Last Will and Testament 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 bypass probate — reducing terminal taxes upon death and decreased waiting times for money.

05

Investment Vehicles

Seg funds can be held in several different forms of investment vehicles, including:

Registered plans: Registered Savings Plans (RSP), Registered Retirement Income Funds (RRIF), and Registered Pension Plans (RPP).
Non-registered plans: Tax-Free Savings Accounts (TFSA), Defined Contribution Pensions, and Locked-In Retirement Accounts (LIRA).

GMWB

Guaranteed Minimum Withdrawal Benefit Plans

Whether you're just beginning to think about retirement or you're already 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. By investing in a segregated fund sold by a Canadian insurer, you can add an additional level of safety. Opting for a GMWB option at any point in your investment life cycle can provide huge benefits when you decide to retire.

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 are recalculated based on current values. This helps drive up the value of your pension.

Guaranteed Pension

Established immediately is your worst-case-scenario pension. Upon application, you know the absolute worst outcome when you go to retire — and 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.