The high cost of using segregated funds

They can put a big dent in your returns

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From the February/March 2015 issue of the magazine.

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Brokerages FeesQ: I’m 71 and have a $35,000 RSP with an insurance company that has to be converted to a RIF. I was told it would be best to put that money into segregated funds. Is that true?

A: Best? Uh, I don’t think so. I do understand the appeal though. Segregated funds, like mutual funds, offer the potential for growth. They usually also provide a maturity guarantee of at least 75%, so that when your deposit matures you’ll receive a top-up payment if the market value has fallen below a certain level. But you pay for that insurance contract with a higher management expense ratio (MER)—it could be upwards of 3% or more versus the average mutual fund MER of 2.3%—and that higher MER can put a big dent in your returns. Plus there can be penalties for withdrawing your money early. I would get clear on your investment objective. If you want capital protection, buy a GIC. If you want growth, buy a low-fee balanced mutual fund. And remember the RIF withdrawal requirements, so choose a product that makes that easy.

Bruce Sellery is a frequent guest on Cityline, and also writes for Today’s Parent and Chatelaine. Do you have your own personal finance question? Write to us at ask@moneysense.ca

 

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