Kelly is on ODSP. She recently received $80,000 in an inheritance from her mother’s estate. This money threatened her ODSP because single people with no dependents are not allowed more than $40,000 in assets. She thought she would lose her ODSP. Her ODSP caseworker told her she would have to either put the money into an ODSP “exempt asset” or lose her ODSP.
Kelly and I sat down to discuss her options. We reviewed a number of ODSP exempt assets, deciding a segregated fund account made the most sense for her.
Under most circumstances, a person on ODSP is allowed to have up to $100,000 in a segregated fund account. Most people are not aware segregated funds are an ODSP exempt asset, including many ODSP caseworkers. When I explained this was an option for her, Kelly was glad the option existed but wanted to know what was a segregated fund.
Most people are familiar with mutual funds which are very similar to segregated funds. Both are investments that invest a large pool of money in a variety of stocks, bonds and other securities. One of the fundamental principles of prudent investing is diversification. Purchasing only one investment, such as stock in a large bank means you live and die by the performance of that one stock. Buying many different stocks and/or bonds spreads the risk. Mutual funds and segregated funds offer that diversification.
There is a wide variety of segregated funds to choose from, including very conservative ones that hold guaranteed investments (e.g. GICs) and government bonds. At the other end of the spectrum there are aggressive segregated funds that invest entirely in stocks. Similar to mutual funds, there are many different segregated funds to satisfy different levels of investment risk and interest.
Segregated funds differ from mutual funds in some key ways. For one, segregated funds are sold exclusively by insurance companies. From a regulatory perspective, a segregated fund is an insurance product, formally known as an Individual Variable Insurance Contract (IVIC) and is governed by the Insurance Act. However, a segregated fund does not act like your typical insurance product. A person does not purchase a segregated fund with the expectation that a predetermined and much greater amount of money will be paid to a beneficiary at death. As I said, it behaves like a typical investment.
Unlike mutual funds, segregated funds offer death benefit (depending on the contract, your beneficiaries will receive 75% to 100% of your contributions tax free when you die) and maturity guarantee options (depending on the contract, 75% to 100% of your principal investment is guaranteed if you hold your fund for a certain length of time to benefit from the guarantee). Segregated funds also allow the investor to name a beneficiary even if it is a non-registered investment (i.e. it is not in an RRSP or TFSA) and are creditor protected*
*There are some exceptions where creditor protection will not be upheld.