Last week, we compared GICs vs. high-interest savings accounts. The result showed that, even if you have the $5,000 needed to get the high-interest savings account rate, you can probably still get better GIC rates, depending on which product and term you choose. Now, how do GICs stack up against government savings bonds? Which one is the better choice for the consumer? Let’s take a look.
Before we look at the differences, let’s outline the similarities. First, both GICs and savings bonds are very conservative investments. Your principal is guaranteed no matter which one you choose. In the case of GICs, the first guarantee is provided by the financial institution. Should they fail, you will be covered by the CDIC or credit union deposit insurance plan up to a maximum amount (as defined by each insurer). With savings bonds, the government has a legal obligation to pay you. Furthermore, GICs and savings bonds can also form part of the fixed income element of your investment portfolio, providing you with consistent interest payments.
So, what about the differences? Well, one thing that sets GICs and savings bonds apart is their availability. To use the federal government’s savings bonds as an example, they’re only available for a few months in the fall. Moreover, only Canada Premium Bonds can be purchased through financial institutions, whereas Canada Savings Bonds must be bought via employer purchase programs (and taken off your paycheque).
Another consideration is the ability to cash in a GIC or savings bond before it matures. With Canada Savings/Premium Bonds, this is possible, although you will forego some interest with the Premium Bonds. As for GICs, cashable GICs can be redeemed early, as the name suggests. Non-redeemable GICsmay be cashable if the bank permits it, but you may well lose any accrued interest.
Ok, so with those details out of the way, how do GICs and savings bonds compare when it comes to interest? Currently, Canada Premium Bonds, which come with a 3-year term, pay escalating rates of interest for each year you hold the product. Those rates are as follows:
Year 1: 1.00%
Year 2: 1.20%
Year 3: 1.40%
Because there are both cashable and non-redeemable GICs, we will do two comparisons against savings bonds. First, we can see on our site that the top rate for a 3-year cashable GIC is currently* 1.15% from Industrial Alliance. For a non-redeemable GIC, the best rate is 2.15% offered through Oaken Financial.
Let’s assume you have $5,000 to invest. How much would you make with the Canada Premium Bonds vs. both the cashable and non-redeemable GICs?
First, let’s see how the Premium Bonds do, recalling the escalating interest rates from above:
Now, let’s turn to the 3-year cashable GIC paying 1.15% interest:
Finally, here are the returns for the 3-year non-redeemable GIC at 2.15%:
To recap, the Canada Premium Bonds return $182.14 in interest, the cashable GIC pays $174.49, and the non-redeemable GIC trounces them both with $329.48 in interest. If you don’t need access to your money for the entirely of the term, a non-redeemable GIC is your best choice, in this low interest rate environment.
*Rates as of April 30, 2015.
Flickr: Simon Cunningham