Why seg funds and annuities are earning their place in portfolios

by Leo Almazora17 Feb 2021

For a long time prior to 2020, it seemed as if low-fee exposure to the North American stock market was the most straightforward path to a decent nest egg for Canadians. But with the financial shock brought about by the COVID-19 pandemic, those approaching retirement or are already living their golden years are revisiting their investment planning strategies.

In a survey of 1000 Canadians aged 55 to 75, RBC Insurance looked at how COVID-19 has affected the finances, savings, and attitudes toward income of people within that group.

“The results confirmed that the volatility of 2020 and the uncertainty of 2021 has definitely had an impact on Canadians who are close to retirement, have recently retired, or are in retirement,” said Selene Soo, director of Wealth Insurance at RBC.

Consistent with most every study on the financial impact of COVID-19 on Canadians, RBC found that survey participants were affected in different ways. Nearly 70% said their finances were not significantly hit by the pandemic, though they are now re-evaluating their saving, investing, and spending because of it.

Forty-five per cent of the survey participants are accumulating their net savings both by putting away more money and paying down debt, which they’ve been able to do largely because of how lockdowns have restricted their daily and seasonal spending patterns. Notably, two thirds of those who have been able to save more money through the course of the pandemic say they’ve worked with a financial advisor, making them more confident that they’ll have enough money to sustain themselves through retirement.

“Canadians between 55 and 75 years old are also spending more money to support family and others who have been impacted by the pandemic,” Soo said. “That includes increasing commitments to the family legacy, investing more in their grandchildren’s RESP, and raising their charitable giving donations, which is so important given the decline in overall charitable activity we’ve seen over the past year.”

However, around 30% of survey participants said that the pandemic has derailed their financial plans, leaving them less confident about their retirement. Within that cohort, 20% said they have had to dip into their nest egg to pay for daily expenses, highlighting the need for portfolio components to help guard against unforeseen situations – such as segregated funds and annuities.

“When you talk about investments, you tend to think about mutual funds, stocks, or bonds,” Soo said. “Insurance almost never comes to mind. General lack of awareness also partly explains the hesitation people have had to include segregated funds and annuities in their portfolios.”

A separate but related reason is that investors may harbour a lot of misconceptions about seg funds and annuities. While segregated funds and annuities may be shunned for being more expensive, less liquid, and less diversified than mutual funds, Soo said there’s a need to help people let go of those notions. Rules under the Bank Act limit banks’ ability to discuss guaranteed investment funds and annuities with clients, which highlights the importance of insurance advisors in helping people consider those financial products.

“I think the most important thing is for people to speak to an advisor who can discuss options and ensure they’re on-track to meet long-term financial goals,” Soo said. “There are so many product options out there and to help clients focus, having a professional to talk about their concerns and needs is just absolutely critical.”

The recent market uncertainty appears to have made people considerably more sensitive to the need for income and wealth protection. Soo noted that a high percentage of survey respondents, particularly retirees and those just nearing retirement, have become more interested in safer investment options that guarantee income.

“There’s a saying that price is only ever an issue in the absence of value,” she said. “Market uncertainty is never going to go away, so I think the key is for clients to work with an advisor and ensure they have an investment portfolio that can withstand the unexpected circumstances, withstand the ups and downs of the market over the long term.”