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What to do to make sure your savings are protected
Q: I am considering retiring early (at 55) and based on advice from my financial planner, I can rather easily do so, primarily based on our assets, lack of any debt, and my wife’s existing defined benefit pension plan.
He suggests converting my pension and RRSP holdings into a RRIF. My concern with that is should something happen to the company, can the value of a RRIF be protected or insured? Is there any way of structuring a RRIF to allow for better protection?
I don’t want to see my life long savings disappear overnight.
—Roland
A: Congratulations on your potential early retirement, Roland. There are a few considerations as it relates to the stability of your retirement savings.
First off, whether your retirement savings are in an Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) likely won’t make a difference. The decision to convert your RRSP to a RRIF is more of an administrative one if your plan is to withdraw from the account every year going forward.
The same consideration would apply with your pension, which sounds like it must be a defined contribution (DC) pension plan. If you’re planning to start taking withdrawals from this account, it must be converted to a Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF) depending on your province of residence.
In your case, Roland, your investment company is covered by the Canadian Investor Protection Fund (CIPF). If they were to become insolvent, up to $1 million of your registered retirement accounts (such as RRSPs, RRIFs, LIFs and LRIFs) would be protected. CIPF would provide you with compensation for any missing property as of the date of the firm’s insolvency.
If you happened to have more than $1 million in your combined registered accounts, you could always consider maintaining them separately at different institutions to multiply your CIPF coverage limits.
Some of your individual investments may also have certain protections, Roland. If you own Guaranteed Investment Certificates (GICs), you may have protection against the failure of those issuing institutions as well.
GICs issued by chartered banks may have federal coverage under the Canadian Deposit Insurance Corporation (CDIC). Credit unions may have provincial coverage like that of the Deposit Insurance Corporation of Ontario (DICO), the Autorité des marchés financiers (AMF) in Québec, and the Credit Union Deposit Insurance Corporation of B.C. (CUDIC), for example.
Registered GICs from CDIC insured issuers have up to $100,000 of coverage, while some of the provincial insurance corporations insure all deposits, regardless of the dollar value.
You have the option, Roland, to convert your registered accounts into an annuity. Whether you do so or not is ultimately an investment decision. Annuities have not been popular in recent years due to low interest rates. But rates are finally rising.
In your case, I’d be that much less inclined to consider an annuity given your wife has a defined benefit (DB) pension plan – which is an annuity of sorts – but I think you need to consider your overall financial situation holistically.
If you chose to use your registered funds to buy an annuity from an insurance company, Roland, they would calculate a fixed monthly amount that they would pay you for the rest of your life. The payment would depend on your age, current interest rates and certain optional features of the annuity.
Assuris is an organization that protects Canadian policyholders if an insurance company fails. They protect up to $2,000 per month of annuity payments or 85% of the monthly benefit – whichever is greater.
It’s important to note that market declines can always put your retirement savings at risk. The only insurance to protect against that is portfolio diversification, so that some of your investments zig when others zag.
In summary, Roland, there are protections in place to safeguard your retirement savings. Failure of a Canadian financial institution is probably not a big risk for you. But hopefully now you’ve got some of the facts that can help give you peace of mind.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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