Another RRSP Option

I think we could all agree that segregation as once practiced in South Africa and in the south of the United States is an undesirable state of affairs.  That does not imply that all segregation is wrong.

In Canada there is an investment product known as a “Segregated Fund.”  These are created by life insurance companies and are, in fact, life insurance products.  They look very like mutual funds if you are not paying close attention.

They are different and the differences will be useful to some.

First of all they are called segregated because they are not part of the assets of the insurance company.  They are held separately.  Company liabilities would not affect them.  The insurer offers them as part of an insurance product known generally as a deferred annuity.  Unlike other annuities this one can be turned back to cash at any time.  Its value will be the value of the fund that underlies the product.

It is like a mutual fund in that the underlying assets may be stocks, bonds, real estate, or combinations of them.  The assets are managed by professional managers.  The managers charge a fee and expenses.  By looking at the portfolio and the return to investors, you would be hard-pressed to distinguish the two.

There are differences that could matter.

Segregated funds are creditor proof subject to the insurance act.  If there is a named beneficiary from the preferred class, the amounts generally are immune to seizure by creditors.  For a business owner who has guaranteed bank loans, this may help them preserve some value when things get difficult.

Many people are aware that a mutual fund RRSP might not be forfeited in an bankruptcy.  Neither will a segregated fund and the segregated fund is also immune to seizure without the necessity of declaring bankruptcy.

Segregated funds may have future value guarantees.  Typically 100% or 75% of contributions either on death or some specified future date, like 10 years or 15 years from issue.  That means you cannot lose your principal regardless of how the markets behave.  Some funds provide for resets so that you can get the highest value of you fund.  Like a ratchet.

Segregated funds probate quickly and inexpensively because there is no probate.  The money goes to the named beneficiary directly.

Some provide lifetime income guarantees regardless of the value of the underlying assets.

Losses within the plan can be allocated to the unit holders in the year of the loss.  You can get a T3 with a negative number on it.  Can’t happen with mutual funds.

There are no free lunches though.  Segregated fund ongoing fees are usually higher than their mutual fund equivalent.  Sometimes the fund selection will be narrower.  There will be options with every asset class but usually fewer.

Segregated funds are not necessarily good for everyone all the time.  Like any financial tool it must fit your personal context and strategic vision.


Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

One Comment on “Another RRSP Option

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