Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Complex investments explained

Guaranteed minimum withdrawal benefit (GMWB) products Add to ...

GMWB products provide guaranteed retirement income that can increase with investment gains in your portfolio and certain bonus features​​​​​.​

GMWB products are a combination of investments and insurance. This is known as a variable annuity. With GMWB products, you get a guaranteed minimum income from your savings each year – starting as early as age 50 for some products. They also provide the potential for investment gains to help increase this income over time.

More Related to this Story

Fees for this product are steep – annual management fees can be significantly higher than for other types of investment funds. Penalties can decrease your guarantee if you make a withdrawal that exceeds the guaranteed amount.

How GMWB products work

GMWB products are offered by insurance companies and can have a variety of features. Here’s how a typical GMWB product might work:

1. You deposit a lump sum of money

In your pre-retirement years, say at age 55, you transfer money to the insurance company, either from your non-registered or registered plan savings, to buy the GMWB product. You can also make additional deposits to the product. Like a traditional annuity, a GMWB product is based on a contract between you and the insurance company.

2. You choose the investments

The insurance company will provide you with a variety of investment funds to choose from. Insurance companies typically limit how much you can invest in equities. For example, the contract may limit you to investing 70% of your deposit amount in equity funds. Or, the insurance company may only offer balanced funds with different mixes of stockbond and money market investments.

Ask if the contract can change:
Depending on the terms of the contract, the insurance company may be able to make changes, such as increasing the fees they charge or increasing investment restrictions on new money that you invest. Before you buy, find out what can be changed and decide if you are comfortable with these terms.

3. Your income guarantee comes into effect

Once your money is deposited and invested, you are entitled to a guaranteed income, beginning at a specified age. A typical product guarantees that you can withdraw 5% of your investment amount each year for life, no matter how long you live or how well your investments perform.

For example, if you deposit and invest $100,000 at age 55, you will be entitled to income of $5,000 each year starting at age 65, guaranteed for life. While you can withdraw more than this guaranteed amount in a year, penalties apply to these “excess” withdrawals – and can reduce your future guaranteed income level.

4. You can increase your guaranteed income

A key feature of GMWB products is the ability to increase your income guarantee, especially in the years leading up to retirement.

This is done in 2 ways:

  1. By receiving an annual 5% bonus – The bonus is based on the amount used to calculate your lifetime income guarantee. It is applied in any year you haven’t taken a withdrawal. Bonus features vary by company, but are typically only paid in the first 15 years of the contract.

  2. By locking in market gains every 3 years – If your investments have gone up in value after 3 years, the amount used to calculate your income guarantee will be based on this value — and never drop below it. This reset feature continues even after you begin making withdrawals.

5. You start making guaranteed income withdrawals

At a specified age, typically around 65, you begin making annual income withdrawals. While these withdrawals decrease the market value of your investments, they do not change the amount used to calculate your annual income guarantee.

6. Your beneficiaries receive the market value

At your death, your beneficiaries receive the market value of your investments.

Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca


In the know

Most popular videos »


More from The Globe and Mail

Most popular