Today’s retiree wants both flexibility and security—it’s all about investment balance. While this balance can be achieved by including either a Guaranteed Investment Certificate (GIC) or an Accumulation Annuity (AA) in your client’s plan, AAs offer important benefits that can make them a better choice for clients who want to maximize their financial legacy.
Safe and secure
Both GICs and AAs offer fixed rates of interest for set periods of time and are not affected by fluctuations in the stock market. As guaranteed investments, both products may be protected against provider failure (up to deposit coverage limits) with protection for GICs provided by Canada Deposit Insurance Corporation and AA protection provided by Assuris.
GICs and AAs are great ways for retirees to diversify their investment holdings. Since the rate of return is not tied to the stock market, these investments involve less risk than market-based funds and can help create a balanced portfolio.
Both products can be used as a flexible way to save. Short-term GICs can mature in 30-364 days or a longer one to five-year term can be selected; AAs offer terms of one to five years. While your client may have every intention of keeping the investment until maturity, in both cases some—or all—of the money can be withdrawn if needed. However, both GICs and AAs may be subject to a market value adjustment if cashed before maturity.
From a tax perspective, GICs and AAs are treated the same way based on the registration type:
- generally, no tax is paid on RRSPs until money is withdrawn from the account,
- interest earned on non-registered accounts must be claimed as interest income, and
- no tax is paid on TFSA investment growth, assuming no excess contributions are made.
Potential creditor protection
GICs and AAs can be protected from creditors in certain circumstances. However, this is not guaranteed so consult a lawyer for more information.
While GICs and AAs are similar in many ways, AAs offer several important advantages for retirees. An AA is a type of insurance contract and, as such, a beneficiary can be named on any account type. When a beneficiary is indicated, the AA is not considered part of the client’s estate and probate is avoided should the client die. The full amount of the AA can be quickly paid out to the beneficiary tax-free, as opposed to the months—or years—it can take to release assets from a will. Naming a beneficiary also eliminates costly probate fees, which can run five to 10% of the estate value, except in Quebec where probate fees do not apply.
Assets that flow through an estate become a matter of public record, which can lead to disputes between family members over the division of assets. An AA with a named beneficiary avoids these disputes because payment is made directly to the selected person.
Another benefit that is unique to AAs over traditional GICs is the opportunity for interest earned on non-registered AAs to qualify as pension income for those ages 65 and over. Under this provision, up to $2,000 of the interest earned each policy year may be eligible for the pension tax credit and may also reduce the amount of provincial tax paid. In addition, this eligible pension income also enables qualifying spouses to split the interest earned on non-registered AAs. This helps shift the tax burden to the lower income earning spouse in the lower tax bracket. Pension income splitting may also help the higher income earner minimize Old Age Security clawback.
GICs and AAs can be great investment products for retirees, allowing them to save money and balance investment risks. The benefits that come with naming a beneficiary and avoiding probate issues on an AA make them a good choice for retirees who want to provide the most money possible to their intended heirs.