Guaranteed investment certificates (GIC's) are a secure way to invest, providing a guaranteed rate of return. The stability offered by these term investments can provide peace of mind and there is no concern over market volatility.

The GIC is an investment tool used by many mature Canadians looking to supplement their retirement income. One problem with this strategy is that the interest income is 100% taxable. Therefore the return is somewhat less after tax has been deducted. Another common problem comes from current economic conditions. Low interest rates and taxes are forcing some people to encroach on their savings in order to maintain a certain standard of living.

There may be a two-step solution to solve these problems. First, you purchase a prescribed life annuity with your capital. Step two will show you how your capital is replaced. The annuity will give you a guaranteed series of payments for the rest of your life. The after tax payment is higher than a GIC because it is made up of a combination of interest and capital. Tax is charged only on the interest portion.

So far you have solved two problems. You have increased your guaranteed income and reduced your taxes for life. The second step is to purchase a life insurance policy to replace the capital used to purchase the prescribed life annuity. The premium for the life insurance is paid out of the increased income that was generated from the prescribed annuity.

The end result is that you have secured a higher guaranteed income for life and reduced your taxes. You have protected your capital at death with the use of permanent life insurance and set up a tax-free death benefit. You could eliminate probate fees with a proper beneficiary designation. You even have the flexibility to alter your beneficiary if your circumstances change.

For clarity we have illustrated this process backwards. You would always obtain the life insurance first before you purchase the annuity. If you are uninsurable you may not wish to proceed with the annuity.

Do not try to apply these strategies on your own. It does not work in all circumstances. Seek expert counsel to implement this plan and if everything works, you truly could have your cake and eat it too.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.