Peter Boys, Boys Financial Services

This Year Consider Investing in Segregated Funds

Investment 21

With today’s volatile markets, people are looking for safety in fixed income type products such as savings accounts, GICs, money market funds and bonds.  Those of you either approaching or in retirement should consider the many benefits of segregated funds.  There are some very powerful advantages with these types of funds.

Just like mutual funds, segregated funds offer a wide range of different investments, and as market values rise, both types get the gains.  Unlike mutual funds however, segregated funds offer the ability to lock in future gains, and provide a guarantee of the invested principal on maturity or death.  Compared to mutual funds, segregated funds provide several additional benefits depending on the type of segregated fund invested in.

  • Some offer a 10 or 15 year contract maturity guarantee of the return of your invested principal (net of any withdrawals) or current market value whichever is greater.
  • As these are insurance based contracts, you can name family members as beneficiaries, offering a degree of creditor protection for the invested funds in the event someone wanted to sue you.  That’s an important benefit for those personal investments held by farmers and small business owners.
  • An additional benefit is that all surrender charges are waived on death, so the full amount gets paid out to the named beneficiaries.
  • By having named beneficiaries, any payout on the death of the annuitant goes directly to the beneficiaries, bypassing probate.  Probate is not a major expense In Alberta, but there can be a significant savings in time and legal fees.
  • Some contracts offer a guarantee of the invested principal on the death of the annuitant ranging from 75% to 100% of the value. As with the maturity guarantee, this is always the greater of current market value or the death benefit guarantee amount.
  • Some offer the ability to lock in market growth by resetting the maturity or death guaranteed amount. As an example; consider someone investing $100,000 that grew to $150,000.  If this amount gets locked in as the new guaranteed amount and this person passes away when the market value has dropped back down to $120,000, the life insurance company would pay out $150,000.
  • Guaranteed Minimum Withdrawal Balance (GMWB) segregated funds go farther, offering a 5% bonus annually that enhances the future pension payout value for every year that no withdrawals are made.  Later, when income is required, they pay out a guaranteed income stream for life, plus still offer the potential to lock in future market gains while taking income to enhance the income to help offset inflation.

The above benefits can be very valuable for risk adverse investors looking for better guaranteed growth.  Segregated funds make sense in a volatile market.  Consider someone in their 70s and in poor health, the 100% maturity guarantee on death ensures all of their money passes to the next generation.

With RRSP season rapidly approaching, take the time to research all of the benefits segregated funds can offer you for RRSP catch up contributions, for Tax Free Savings Accounts or unregistered investments for farmers or small business owners.

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