Annuities are a popular retirement income option in Canada, offering individuals the ability to receive a steady, guaranteed stream of income for a specified period or for their entire life. While annuities provide stability and peace of mind, it is essential to understand the associated risks and considerations before purchasing an annuity. In this blog post, we will explore the different potential risks, factors to consider and key decision-making points for those who are interested in purchasing an annuity product in Canada.
Introduction
In the Canadian investment banking industry, acronyms are commonplace and often used to refer to various financial instruments. Two such acronyms that frequently cause confusion are GICs and GIFs.
While they may sound similar, they represent distinct investment options with different characteristics and purposes. Recently, GICs and GIFs are becoming very popular as the returns have been increasing with the rapid rise in interest rates from the Bank of Canada.
In this blog post, we will delve into the differences between GICs (Guaranteed Investment Certificates) and GIFs (Guaranteed Interest Funds) to help you understand their features, benefits, and suitability for your investment goals.
Understanding GICs – Guaranteed Investment Certificates
Guaranteed Investment Certificates (GICs) are fixed-term investments offered by Canadian financial institutions. GICs are considered low-risk investments as they offer a guaranteed rate of return over a predetermined period. They provide investors with a fixed interest rate and principal protection, making them popular among risk-averse individuals.
Key features of GICs include:
Fixed Terms: GICs have specific maturity dates, ranging from a few months to several years. During this term, the invested principal and interest remain locked-in.
Fixed Interest Rates: GICs offer a predetermined interest rate for the entire term, providing investors with a predictable return on investment. The interest rate is agreed upon at the time of purchase.
Principal Protection: GICs guarantee the return of the initial investment amount upon maturity, regardless of market fluctuations.
Low Risk: GICs are considered safe investments as they are typically backed by government or corporate issuers and offer a guaranteed return.
Limited Liquidity: GICs have limited liquidity options, with large penalties for early withdrawal or redemption before the maturity date.
Insurance Protection: GICs are eligible for CDIC deposit protection up to $100,000 per institution. This means that your investments are protected in the event of insolvency by your institution.
Limited Creditor Protection: Non-registered GICS do not have any specific protection from creditors. There may be creditor protection for RRSPs in specific bankruptcy situations.
Probate Issues: Funds can be held in probate for 6 to 12 months, if not longer.
Understanding GIFs – Guaranteed Interest Funds
Guaranteed Interest Funds (GIFs) are investment products offered by insurance companies in Canada which are very similar to GICs offered by banks. Just like a GIC, GIFs offer a guaranteed rate of return for the duration of your investment term. However, at no additional cost, GIFs offer benefits that are not available with GICs which include bypassing probate (1.5% savings) and quick settlement in the event of death (usually within 30 days), possible creditor protection and they are redeemable before the end of the investment term.
Key features of GIFs include:
Flexible Redemption: Unlike GICs, GIFs offer greater liquidity options, allowing investors to redeem units or make withdrawals before the maturity date.
Creditor Protection: GIFs have the potential for creditor protection.
Claims at Death: GIFs allow for quick and easy payments in the event of death (usually within 30 days) because they allow for named beneficiaries which bypass probate, unlike a GIC. Beneficiaries do not pay taxes on the realized capital only on the gain from the time of death and redemption.
Estate Savings: GIFs do not have any estate settlement costs, unlike a GIC which can equal savings to 1-2% in fees.
Fixed Terms: GIFs have specific maturity dates, ranging from a few months to several years. During this term, the invested principal and interest remain locked-in.
Fixed Interest Rates: GIFs offer a predetermined interest rate for the entire term, providing investors with a predictable return on investment. The interest rate is agreed upon at the time of purchase.
Principal Protection: GIFs guarantee the return of the initial investment amount upon maturity, regardless of market fluctuations.
Low Risk: GIFs are considered safe investments as they are typically backed by government or corporate issuers and offer a guaranteed return.
Insurance Protection: GIFs are eligible for Assuris deposit protection. This means that your investments are protected in the event of insolvency by the insurance company. 100k or 90% of your investment whichever is higher.
Conclusion
GICs and GIFs have many similarities, but GIFs provide some additional benefits which should be considered before investing. Banks cannot offer GIFs as they are technically an insurance product which is one of the main reasons that they are often overlooked by many Canadian investors. As a matter of fact, most Canadian investors do not know that GIFs exist.
One of the main benefits that a GIF provides over a GIC is their ability to be redeemable and estate protection. When you compare the guaranteed interest rates offered by GICs and GIFs, the rates are often very similar so it makes no sense to choose a GIC over a GIF.
With the recent increase in interest rates by the Bank of Canada and the unpredictability in the stock market, many Canadians are considering investments that produce a guaranteed rate of return.
If you are in this situation, please reach out to one of our experience advisors to compare current rates to see which route is best for you. Whether it be a GIC or GIF, we can assist at Life Annuities.com.
