Should I Use Segregated Funds In My RRSP?

segregated funds rrsp
Segregated Funds in RRSPs

Segregated Funds in a RRSP

If you’re investing in your RRSP, segregated funds (segfunds) are an often overlooked option. They offer different benefits than other investments you could make. But they also come with a few expenses you have to consider.

What Are Segregated Funds?

Segregated funds are investment vehicles, similar to mutual funds. But they are used and sold by Canadian insurance companies to manage variable annuity insurance products. You will not find them traded on public markets and must buy them directly from an insurance company.

A segregated fund mainly consists of individual, variable insurance contracts. These contracts offer you some guarantees, which offers a major difference from mutual funds. Insurance contracts appreciate, but they don’t offer you ownership of the investment company.

The “segregated” in segregated funds refers to an important fact: the fund is separate from the insurance company’s investment funds. You’re not investing in the insurance company when you buy into a fund.

What Do You Get When You Buy Segregated Funds?

The actual investments in a segregated fund are in the underlying assets the contract holds. These financial instruments are the ones that allow your contract to appreciate over time.

Beyond the assets held in your contract, segregated funds offer certain guarantees. They usually come with a guarantee to cover at least 75% of your principal investment.

Benefits Of Segregated Funds In An RRSP

Guarantees & Protections

Segregated fund contracts always guarantee between 50% and 100% of your premiums at maturity less any withdrawal amounts. In some cases, you can even get an income guarantee.

Segregated funds also have protections that are great for business owners and self-employed professionals. Contracts are protected against seizures from creditors in the case of an unexpected bankruptcy.

Market-Based & Pooled Investments

Like mutual funds, segregated funds are pools of money from many investors. These investors each contribute to increasing the total value of the fund. But because they’re insurance contracts, they also receive the protections we’ve discussed.

Beneficiaries

As insurance products, segregated fund contracts make it easy to establish your beneficiaries. That means that the death benefit will avoid estate plans and go directly to your named beneficiaries.

Drawbacks Of Segregated Funds In An RRSP

Risk

There is a reason why segregated funds come with guarantees for 50%, or sometimes even 100%, of your principal investment. Insurance contracts are long term, perhaps 10 or 15 years.

It’s important to remember that segregated funds are legally considered to be insurance products. As such, the governing bodies that oversee their use are the same ones that cover insurance companies and their life insurance policies.

Maturity

Segregated funds should be held until maturity. Investors can choose to invest in a fund based on investment goals and insurance product terms. These goals can vary, however.

Payouts from segregated funds begin once the specified maturity date has been reached. Investors can then choose a payout schedule offered by the insurance product.

Summary Benefits and Drawbacks

Advantages: Segregated Funds in a RRSP Disadvantages: Segregated Funds in a RRSP
Guarantees & Protection Risk
Market-Based & Pool Investments Maturity
Beneficiaries Cost

Should I Consider Adding Segregated Funds To My RRSP?

Segregated funds can complement an RRSP. If you can add contracts with strong guarantees, they add another source of income to your retirement portfolio.

What to do now?

  • We supply you with the best segregated funds and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your segregated funds please use our Segregated Fund Form.

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