– Yes, according to the rate monitor website ratehub.ca, you’ll currently
see five-year fixed-rate non-registered, non-cashable GICs being offered at
an annual rate of between 3.00% and 3.50% at the top end of the range. At
the low end, you’ll be offered the awesome return of 1.25%.
Guaranteed Investment Certificates (GICs) are really a type of locked-in
deposit. Because the financial institution gets the use of your money for
the specified term, it will offer a slightly higher rate than you’d get
with a totally liquid deposit such as a savings account, a money market
fund, or a short-term Treasury bill.
GICs are offered with many term lengths, depending on the financial
institution. Terms range from six months up to as long as 10 years. Most
popular are five-year terms. The annual interest rate offered remains
static for the term of the GIC, and interest may be paid monthly,
quarterly, semi-annually, or annually, depending the financial institution
and the conditions of the GIC. Your money is locked in until maturity, and
you’ll pay a penalty if you decide to cash out early.
Some financial institutions will offer redeemable (that is, cashable with
no penalty) GICs. However, these GICs offer a (usually much) lower annual
rate than the non-redeemable version for the same term.
Another variation is the market-linked GIC, whose rate of return is
variable and linked to a market index of some type, for example, the
S&P/TSX 60 Index or the S&P 500 Composite Index. Interest will
typically be paid at maturity, a crucially important point to remember if
you’re considering this type of GIC. That’s because it’s impossible to
predict how the linked market index will do over the term of the GIC.
While the principal amount of your investment in the GIC is protected, at
maturity, you may also receive a lump sum if the market has performed well,
or you may receive a pittance – or even worse, nothing at all – if the
market has underperformed or tanked. The end return is usually calculated
by the financial institution based on a complicated formula that typically
looks like an equation from an astrophysics textbook.
With market-linked GICs, you don’t get a regular income, and your ultimate
return is tied to a market index, the future performance of which is
unknowable. So this type of GIC has lots of drawbacks and is in effect a
high-risk bet on a market-linked return sometime in the future. Most
advisors stay away from these kinds of products, looking at them as neither
fish nor fowl, but some awful combination of the worst characteristics of
The principal amount (but not the interest) of a GIC investment is covered
by the Canada Deposit Insurance Corp. or in the case of credit union GICs,
by a provincial equivalent, to a maximum of $100,000 per institution. Check
the terms of your prospective GIC to determine your specific coverage.
Investors looking for income should look for GICs that pay interest more
frequently, perhaps monthly or quarterly. If cash flow isn’t a problem, and
you don’t mind having your money tied up for a longer term, opt for less
frequent payments, perhaps annually or semi-annually.
Another strategy to help deal with cash flow is to buy GICs with staggered
maturity dates, often called a GIC “ladder.” For example, you’d buy a GIC
maturing in one year, another in two years, another in three, and so on.
That way, you’ll have a regular income stream, but you’d also have access
to some of your principal every year, and decide at each maturity date
whether to keep rolling over the ladder or deploying the maturing principal
amount in other investments.
Buying GICs is one way of allocating part of your portfolio to risk-free
assets, but it does tie up those funds for a set term, with no penalty-free
access until the GIC matures. Before committing to a GIC allocation, speak
to your advisor to see whether the strategy fits with your overall plan.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at firstname.lastname@example.org for a
confidential planning consultation.
Notes and Disclaimer
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