Guaranteed Minimum Withdrawal Benefit Plans

Canada’s first Guaranteed Minimum Withdrawal Benefit (GMWB) product was made available in 2006. Since then, Guaranteed Minimum Withdrawal Benefit Plans and Guaranteed Lifetime Withdrawal Benefit Plans have grown in popularity as an increasing number of Canadians approach retirement age seeking more assurance that their assets are protected, especially during steep market downturns, and that income will be there when they need it. Most of Canada’s largest insurance companies now offer versions of GMWB products.  Guaranteed Minimum Withdrawal Benefit Plans are a form of Variable Annuity Contracts.

The main purpose of GMWB plans is to protect those entering what is called the “retirement risk zone,” defined as the five to ten years before and after retirement. This is when investment portfolios are most vulnerable to market volatility and major downturns.

GMWB plans provide a guaranteed income with the potential of capital appreciation. Because the plans are an insurance product, the investor also receives the benefits of a segregated fund, such as a death benefit guarantee. The investor deposits money into the plan, and that principal will be returned over a specified number of years. The amount that is returned can be greater than the minimum guarantee because the money is invested in segregated funds. Their upside potential, locked in at resets, sees income payments increase.

The growth – whether market value or bonus – as well as any distribution of the underlying investments is not taxed, and the investment therefore grows on a tax-deferred basis. Part of the payout is treated as regular income for tax purposes, but the majority is treated as a return of capital and is therefore not subject to tax.

In the case of Registered Retirement Income Funds (RRIFs) and Registered Life Income Funds (RLIFs), payouts are treated as income per government regulations. When invested in non-registered accounts, there are no mandatory withdrawals associated with the account as there are with RRIFs, but market and minimum withdrawal balances are adjusted. Lifetime payout options will affect the payout values. Full withdrawals are based on market value less deferred sales charges, if any.

Unless held in a registered plan, there is no maximum on the amount that can be contributed to the plan as either a lump sum or periodic investment. For registered plans, such as Registered Retirement Savings Plans (RRSPs), contributions are based on applicable legislation.

The death benefit varies from product to product. Beneficiaries may have the option to continue receiving the payouts or take the cash value. The cash value in most cases will be based on the greater of the principal invested adjusted for any withdrawals or the market value.

GMWB plans are offered by many insurance companies, each with a slight twist or extra feature that’s not quite the same as any other plan. In addition, there are numerous fees and charges associated with these plans, which you should thoroughly research before investing.

When you purchase or invest in a segregated fund or guaranteed minimum withdrawal benefit plan, the fund is required by regulation to provide you with information about the fund and contract in the form of an information folder, a summary fact statement, and financial statements. The information folder is the equivalent of the prospectus you would receive if you were buying a mutual fund and will detail many important aspects of the fund, including information and details on factors affecting maturity values, death benefits, reset features, fees and commissions and much more.  Segregated funds unit values fluctuate and redemptions or sales can be made at a loss.

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