Not Investing in typical GICs? Know your options.


Stretching your hard earned savings becomes more important as you approach retirement. If you have a financial advisor, you can work with them to explore investment options that may help to maximize your retirement income.

In the current low interest-rate environment this often results in steering away from typical GICs or government bonds, and toward higher-yielding investments. The interest earned from a typical GIC is often not enough to provide the investor with a monthly income that will sustain their lifestyle during retirement. As a result, your financial advisor may suggest alternative investments that offer higher returns. OBSI investigates thousands of investment complaints, many from individuals close to or at retirement who have struggled with their investments. It is important to keep in mind that these alternative higher-yielding investments are generally riskier than GICs and may have complex features.

Get to know a few of your investment options that offer higher return:

1. Fixed-distribution mutual funds: Fixed distribution mutual funds promise to pay a fixed amount, usually a dollar amount or a percentage of the fund’s assets. These mutual funds provide higher, relatively stable monthly income. Many retirees find these products attractive because they pay more than a typical GIC. Unfortunately, low interest rates have made it more difficult for these funds to generate higher returns without taking more risk. And some funds cannot take on too much risk without violating their fund obligations. If a fund cannot generate enough returns to meet its distribution obligations, the fund may simply return a portion of the investor’s original principal.  The distribution looks like income, generated from investment returns, but it is actually just a return of the investor’s own money (return of capital).

In addition to risk, investors shouldchess-pieces consider the tax implications of these investments. A portion of the distributions can be treated as a return of capital, which can be immediately beneficial from a tax perspective since return of capital is not taxable. However, this also reduces the adjusted cost base of your investment, which can result in higher capital gains tax in the future.

2. Index-linked GICs and Principal-Protected Notes (PPNs): These products provide a capital guarantee at maturity with returns linked to the performance of an underlying index or basket of securities. One benefit of this type of investment is the potential to achieve higher returns than government bond or typical GICs. The return, however, is not guaranteed and investors’ risk increases as the duration of their investment increases (i.e. matures after 3, 5 or 7 years). Many of these products also do not provide regular income distributions, but rather provide a return only at maturity. This may make them unsuitable for seniors who need regularly scheduled distributions. Keep in mind that while the capital is considered guaranteed at maturity, you may be exposed to capital losses if you sell your investment prior to maturity and may incur early redemption fees.

3. Corporate Bonds: Corporate Bonds offer meetinga yield higher than GICs or government bonds. While the issuer guarantees a rate of interest and the return of capital at maturity, this guarantee depends on the issuer’s ability to pay it.

Unlike government bonds that are considered to be lower risk, corporate bonds are generally considered to be riskier, hence the higher yield. The risk depends on the credit quality of the issuer, the duration of the bond and general market conditions.

4. Rate Reset Preferred Shares: Rate Reset Preferred shares (RRPs) pay a fixed dividend until the reset date (generally five years). The fixed dividend amount is based on a spread above the 5 Year Government of Canada bond yield. These shares became extremely popular in 2008/2009 when interest rates were at historic lows and investors saw these RRPs as a way to obtain higher yields. However, investors should be aware of the fact that their principal is not guaranteed, and the market value of these investments is sensitive to changing interest rates and becomes more vulnerable closer to the reset date. If interest rates decrease to less than what they were when the RRPs were purchased the market value of the RRPs will fall drastically, and the dividends will reset at a lower amount.

If you have questions or concerns about your investments talk to your financial advisor. For help with unresolved complaints contact OBSI for a free independent review.

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