Segregated Fund and Annuities¶

- Guarantee
    - 75%/100% (maturity/death; minimum 75%)
    - 10 year / 15 year maturity / upon death

- higher MER than mutual fund (for the associated guarantee)

- the beneficiaries receive the greater of the contract value or the guarantee

- not subject to a health underwriting

- GLWB (guaranteed lifetime withdrawal benefit) plan
    - ensure a certain level of income
    - but annual income will be less than if only 20-year guarantee
    - more meaningful to someone expects to live a long life

- GMWB (guaranteed minimum withdrawal benefits)
    - a rider election form is required
    - the form advise that withdrawal above the guaranteed annual may impact future amount

- reset the gurantee
    - the guranteed amount will change = "market value" * "guarantee rate"
    - the maturity date will reset to full

- the investment can be redeemed prior to the maturity date
    - but guarantee will not apply

- upon maturity or death
    - the beneficiary receive the greater of the market value and the guaranteed amount
    - if death, "the declaration of death" can be done by the beneficiary or the estate trustee

for application to sent to insurer
- first deposit

for a purchase to complete
- the information folder
- fund facts documents
- contract confirmation

requires a client to sign a delivery receipt + witness to acknowledge receipt of above docs

- interest
    - full taxed
- capital gain
    - 50% taxable
- NAVPU price increase
    - not a taxable event unless the units being liquidated
    - refer as "paper gain"

- ratio = withdraw / current value
- new guarantee = old guarantee * (1- above ratio)

- longer maturity date
- charge higher MER
- reduce the number of allowable resets
- charge a higher load (commission)

disadvantage:
- more risk than individual based
    - do not offer a maturity or guarantee upon death

advantage:
- no sales charges
- no switch fees
- lower MER than individual basis

- more initial premium -> more investment -> more tax

- named beneficial receive the payment

- doesn't require medical underwriting

- accrual annuity
    - more tax in year 1
- prescribed annuity
    - the tax of income is spread evenly over the life of annuity

- straight life annuity (= no guarantee)
    - contract/payment stops upon the holder's death

- life annuity with a guaranteed term
    - a beneficiary may have a claim; eg. a 10-year guarnatee

- insured life annuity
    - buy a permanent life insurance
    - buy an immediate annuity (= straight life annuity)
        - with the payment >= the premium of life insurance
    - eg. to have a lump sum guaranteed after death and still have money to spend 

- life annuity with a guaranteed term
    - payment stops when the term ends

- accumulation annuity
    - do not pay an income
    - similar to a compound GIC
    - the value grows overtime and no payments are made
    - upon death, the beneficiary would have a claim

- join-and-last-survivor annuity
    - payment continues until both annuities have died

- impaired annuity = enhanced, age-rated, accelerated
    - pay lower premium 
    - or receive a higher income for the same premium/deposit

- registered annuity?

- GMWB (guaranteed minimum withdrawal benefit)

- GLWB (guaranteed lifetime withdrawal benefit)

- inflation risk
    - for fix income, longer term, higher risk
    - to lessen the risk, choose indexed term annuity

- interest rate risk
    - affect fixed interest rate investment

- expected return
    - the risker, the higher
    - dividend > balanced
    - mutual fund > segregated fund

- the safest type of mutual fund
    - 95% of net assets must be invested in cash or equivalents
        - short-term government of Canada bonds
        - treasury bills

- coupon rate depends on
    - term to maturity, the longer, the higher
    - creditworthiness, the riskier, the higher

- inverse relationship between interest and market value of existing bonds

- current market value
- ACB
- withdraw
    - back-end load fee (eg. 1.4%) on 5-7 years

- no-load mutual fund
    - no up-front commission
    - charge a higher MER to compensate

- mimic the applicable index instead of trying to beat
- lower MER than mutual fund and segregated fund

- very safe investment
- relatively low return

- GRRSP, DPSP, DBPP can be transfer to another group plan
- Group TFSA can only be transfered to individual plan

- segreated fund helped in registered account
    - creditor proof no matter who the beneficiary

- over-funded = pension surplus
- taxation generally discourages the building of surpluses
- the regulators may require the sponsor use the surplus to further enhance benefits
- the employer not able to withdraw the surplus

- pension buy-in
    - use the funds accumulated in DBPP to purchase an annuity

- more common for unionized employees
    - who works for different employers not affiliated

- need to qualify

- contributions result in tax saving
- any investment income earned inside is sheltered from tax until withdraw
- switch between providers not withdraw, no tax implication

- can contribute to
    - individual's own name
    - a spousal RRSP in the spouse's name
        - spouse is the policyholder (= annuitant)

- can be used to reduce income taxes even prior to retirement

- calculate contribution room
    (the room is cumulative and combines RRSPs, pensions etc)
    = 18% of prior year's earned income     
    - pension adjustment (PA) from prior year
    + unused contribution room
    + un-used lifetime allowable over-contribution limit ($2,000)

- calculate earned income for RRSP purpose (amount to calculate 18%)
    - only earned income
        - employment income
        - rental income
        - business income
    - not include passive income
        - dividend etc. investment income
        - income from rrsp withdrawl
(but all income will be taxable)

- contribution limit for the year only applies to the specific year
    - not apply to unused room, or the over-contribution of $2000

- spousal RRSP
    - the account belongs to the spouse
    - the contributor reduce his/her contribution room and deduct tax
    - suitable when the spouse will be in lower tax bracket in retirement

- can't be withdrawed by spouse right away
    - attibution rules prevent abuse of certain tax opportunities

- group RRSP (GRRSP)

- when established
    - the plan holder will be required to withdraw a minimum amount each year
    - and pay the applicable tax
- should not establish prior when turn 71, unless need income each year going forward

- saving phase
    - leave the funds with the previous employer to continue to grow
    - transfer the funds to new employer if allow to transfer
    - use the funds to buy a registered deferred annuity that will not pay until retirement
    - transfer to a locked in RRSP (LIRA)
        - lock-in means the holder can't access the funds until retirement
- income phase
    - LIF (life income fund)
    - LRIF (locked-in retirement income fund)
    - RRIF (registered registered retirement income fund)
    - PRIF (prescribed registered retirement income fund)
    - RLIF (restricted life income fund - for federally regulated pension plans)
    - life annuity in payment mode

- apply to funds transferred from a pension plan, not group RRSP

- benefit will be reduced by 0.6% for every month when taken earlier than 65
    - full CPP x (100% - 0.6% x "number of month before 65")

- up to 50% can be shared with spouse for tax purposes
- pension income is 100% taxable

- pension income includes
    - company pensions
    - RRSP annuities
    - RRIF income
    - deferred profit sharing plan annuities

- deposits guaranteed if
    - the institution is a member of CDIC
    - in Canadian dollars
    - the original term to maturity is 5 years or less
    - coverage up to $100,000

- market-linked GIC is covered
    - just the interest payable is depend on market performance

- protection for annuity
    - accumulation mode
        - 100% up to $100,000
    - payment mode, the greater of
        - 100% up to $2,000
        - 85% of the payment

- if at maturity/death, the contract is less than guaranteed amount
    - the new insurer can't honer the guarantee, file a claim with Assuris

- Quebec
    - notice of replacement of insurance of persons contract

- Other provinces
    - LIRD (life insurance replacement declaration)

- segregated funds, annuities (both the deposited amount and the payments)
    - can be shielded from one's creditor
    - protected class beneficiaries (either revocable or irrevocable)
        - parent, spouse, child, grandchild
    - irrevocable beneficiary

- registered account is creditor-proof no matter beneficiaries

- good faith
    - buying segregated funds, annuities as investment
    - not to avoid creditors as known filing or bankruptcy

- within two business days of receiving the information folder
- the lesser of the amount invested and the actual value on the day
    + the front-end load charge will be refunded

- 5-year GIC before mature
    - charge significant penalties

- payout annuity
    - do not permit withdraw at all

- front-end-load segregate fund (initial sales charge ISC)
    - not incur a sales charge upon redemption (withdraw)

- back-end load (deferred sales charge DSC)
    - charge a fee when sell units
    - the longer the hod, the less the fee
    - some fund 

- low load / low sales charge (LSC)
    - charge a lower sales charge when buy
    - charge a lower redemption fee when sell

- no load
    - probably will have higher MER

- up-front commission (sales charge)
- trailing commissions for ongoing service (paid from MER)

- report in 14 days of the transaction
    - if client is PEEP (politically exposed foreigh person)
    - deposite of $100,000 or more in any form

- liquidity risk
    - the investment can't be sold quickly without loss of capital
- credit risk
    - an issuer won't pay promised payment
- market risk
    - entire market decline as a result of uncontrolled events
- inflation risk
    - fixed income subject to inflation risk

- low level of financial literacy
    - "financial literacy" refer to a client's ability to understand basic financial concepts