Q&A: Escalating GIC

This reader’s adviser recommends a three-year GIC with an escalating interest rate. Good idea or not?

Q – I met my financial adviser and he told me to put my money in a non-registered, escalating rate GIC for three years. The first year interest rate is 1.6%, the second year is 1.8%, and the third year 2.2%. The other option is for one year at the rate for 1.6%. Do you think is a good idea? – George N.

A – No, I do not. Using the numbers you provide, the average annual compound rate of return over three years is 1.87%. The current inflation rate is 2.1%. If that continues, you will be losing money in the form of purchasing power every year. To make matters worse, this is non-registered money, which means the interest will be taxed. It you’re in a 40% marginal tax bracket, your after-tax first-year return will be 0.96%, the second year will be 1.08%, and the third will be 1.32%. This means your after-tax return for each $1,000 invested will be $41.34 over three years for an average after-tax compound rate of return of 1.36%. Let me put the question back to you. Do you think this is a good idea? – G.P.