Updated August, 2021
Segregated funds were initially developed by the insurance industry to compete against mutual funds. Today, many mutual fund companies are in partnership with insurance companies to offer segregated funds to investors. Segregated funds offer some unique benefits not available to mutual funds sold by banks and other financial institutions.
The major benefits of Segregated Funds
- They offer a guarantee of principal upon maturity of the fund or upon the death of the investor. Thus, there is a 100 percent guarantee on the investment at maturity or death (this may differ for some funds), minus any withdrawals and management fees - even if the market value of the investment has declined. Most segregated funds have a maturity of 10 years after you initial investment.
- They offer creditor protection. If you go bankrupt, creditors cannot access your segregated fund.
- They avoid estate probate fees upon the death of the investor.
- They have a "freeze option" allowing investors to lock in investment gains and thereby increase their investment guarantee. This can be powerful strategy during volatile capital markets.
Other benefits of Segregated Funds
- They issue a T3 tax slip each year-end, which reports all gains or losses from purchases and redemption that were made by the investor. This makes calculating your taxes very easy.
- They can serve as an "in trust account," which is useful if you wish to give money to minor children, but with some strings attached.
- They allocate their annual distributions on the basis of how long an investor has invested in the fund during the year, not on the basis of the number of units outstanding. With mutual funds, an investor can invest in November and immediately incur a large tax bill when a capital gain distribution is declared at year-end.
There has been a lot of marketing and publicity surrounding segregated funds and how much value should be placed on their guarantee of principle protection. With major market downturns like 2008 that can wipe out your retirement savings instantly, having a principle guarantees on your investments looks pretty attractive. With stock market cycles and volatility, the odds of losing money after ten years are extremely high. If you decide you need a guarantee, it can cost as much as 1/2 percent per year in additional fees.
If you would like more information on protecting your retirement savings, please contact me.