J. Elizabeth Kagan

In the stable of RRSP investment options, Canada Savings

Bonds (CSBs) are more like the ox that pulls the plow than

the temperamental racehorse. CSBs plod steadily along in a

steady and reliable manner. While flashier and more volatile

investment options such as stocks sometimes leave them

behind, CSBs offer strength and stability that makes them

consistently reliable.

“Security of savings continues to be a strong driver of

financial decisions for Canadians, even stronger than rate

of return,” says Jacqueline Orange, President and Chief

Executive Officer of Canada Investment and Savings, a

Special Operating Agency of the federal Department of

Finance responsible for the Canada Savings Bonds Program.

“Financial markets are unpredictable and volatile, and

Canada Savings Bonds offer investors a safe and reliable

option with the ability to redeem at virtually any time.”

CSBs are fully backed by the Government of Canada, which

makes them one of the safest investments around. The safety

feature appeals to Canadians who have been found by various

surveys to be conservative investors. According to the 2004

National Savers Study, Canadians cite security as their top

priority when it comes to savings, followed by rate of

return, customer service, fees, and convenience of

purchasing.

“Canada Savings Bonds offer liquidity and stability, and are

a valuable anchor for conservative investment portfolios,”

says Patricia Lovett-Reid, senior vice-president at TD

Waterhouse Canada Inc. “They're a good place to park money

you don't need right away for day-to-day expenses and bill

payments, and their easy liquidity means they can be cashed

anytime for emergencies. While CSBs don't offer the capital

gains potential of equities, there is no chance of loss.”

The CSB is available in either regular or compound interest

form. It has a 10-year maturity, and interest rates may be

increased if conditions warrant, but they will never go down

during the priced period.

The latest National Savers Study also found that a “rainy

day” savings fund set aside for short-term needs

significantly reduced any anxiety Canadians might feel about

their financial situation, even if the rate of return isn't

high. Approximately 64% of Canadians have a rainy day fund

that is easily accessible for short-term needs and

emergencies, and CSBs make an ideal investment for such a

fund.

A separate benchmarking study commissioned last fall by

Canada Investment and Savings showed the government-backed

bonds were competitive with interest-paying vehicles such as

money market funds and GICs. Based on holding the bonds to

maturity and reinvesting in a new issue, the study found

that regular CSBs yielded better returns than the average

one-year GIC sold by major financial institutions in eleven

of the past 15 years.

A big advantage of CSBs is that they can be purchased with a

small amount of money and are therefore accessible to people

with limited savings. The minimum purchase is $300 for

regular interest bonds, and $100 for compound interest

bonds. The CSB is available through the handy payroll

savings plan that allows you to purchase through automatic

deductions from your pay cheque.

Investors looking for higher rates may want to look at a

variation on the original CSB called the Canada Premium Bond

(CPB). The CPB was introduced eight years ago and now

accounts for about 70 per cent of total Canada Savings Bonds

sales through financial institutions, Orange says.

In return for the higher rate of interest, investors in CPBs

lose some liquidity. Unlike regular CSBs that are redeemable

at any time, CPBs can be redeemed once a year on the

anniversary of the issue date and during the 30 days

thereafter. The benchmarking study showed that the CPB has

outperformed the one-year GIC rate every year since its

introduction in 1998.

“If you don't need the ability to cash out any time, you're

better off buying the Premium Bonds,” says Orange. “They

offer the best of both worlds – a higher and more

competitive interest rate than the CSB, with the same

attractive safety and security features.”

Investors who wish to hold CSBs or CPBs in an RRSP can take

advantage of a no-fee plan offered by the Government of

Canada. Called The Canada RSP, it requires a minimum

investment of $500. If you already hold bonds and are

finding it hard to come up with the cash for an RRSP

contribution, you can transfer compound interest CSBs and

CPBs you already own “in kind” to the plan.

For more information, visit www.csb.gc.ca

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Play It Safe and Start Early – Two Keys to Investment

Success

J. Elizabeth Kagan

Canada Savings Bonds (CSBs) and saving for retirement make

good partners in helping Canadians achieve financial

security. The secret is to start saving early and reap

maximum benefits from the power of compounding interest.

“The younger you start saving, the better off you're going

to be in retirement,” says Jacqueline Orange, President and

Chief Executive Officer of Canada Investment and Savings, a

Special Operating Agency of the federal Department of

Finance responsible for the Canada Savings Bonds Program.

“Time is your best friend. Investing can seem complicated

when you look at the range of different products available,

but the idea of starting early is a simple concept that can

have a huge impact on investment performance in the long

run.”

For example, if you start now and invest $500 a year for 10

years at an interest rate of 2.5 per cent a year compounded,

the value of your nest egg will be $5,742 in 10 years. If

you wait five years and then invest $1,000 for the next five

years at the same rate of interest, 10 years from now the

value will be $5,388. You've contributed the same $5,000,

but by starting sooner you can significantly enhance your

returns.

If you start young, compounding has more time to work its

magic. Assuming a 2.5 per cent average annual compounded

return, an amount of $5,000 invested for 40 years could grow

to $13,425 – without a single additional contribution.

Within an RRSP, Canada Savings Bonds provide a stable,

secure foundation and the opportunity for long-term growth

on a tax-deferred basis.

The CSB has some advantages over other investment options in

easing the pain of saving. For example, compound interest

bonds are widely available through payroll deduction plans

whereby the purchase amount is spread over a year and

deducted on a regular basis from your pay cheque. When the

money never even hits your bank account, it's easy not to

spend it on other things. Currently, about 12,000 private

and public sector organizations offer payroll deduction

plans for CSBs.

"There are a lot of people who want to save, but have

trouble with discipline," says Michael Dumond, senior-vice

president and financial planner at Money Concepts in Barrie,

Ont. "With a payroll savings plan you don't have to come up

with a lump sum to buy CSBs. It's an easy and convenient way

to accumulate a nest egg. You can't spend the money

frivolously when it's automatically deducted from your pay."

In addition to helping Canadians save for retirement, CSBs

are a good alternative for "rainy day" funds. The 2004

National Savers Study found that a special savings fund set

aside for short-term needs significantly reduced any anxiety

Canadians might feel about their financial situation, even

if the rate of return isn't high. Approximately 64% of

Canadians have a rainy day fund that is easily accessible

for short-term needs and emergencies, and CSBs make an ideal

investment for such a fund.

You don't need a lot of money to buy Canada Savings Bonds.

The minimum purchase requirements are $300 for regular

interest bonds and as little as $100 for compound interest

bonds. If you're buying through the Payroll Savings Plan you

can purchase for as little as $2 per weekly pay cheque.

About half the CSBs sold every year are purchased through

payroll plans, Orange estimates.

Canada Savings Bonds interest rates are competitive. The CSB

has a 10-year term, and the posted annual rate could be

increased if market conditions warrant, but it will never go

down during the priced period.

"CSBs are your ally, not your enemy, in a rising interest

rate environment," Dumond says.

The Government of Canada also offers the Canada Premium

Bond, a variation on the original CSB that pays a higher

rate of interest, although slightly less cashable than the

CSB. If you're looking for higher interest, and don't

require the instant liquidity of the CSB, the CPB is an

attractive alternative.

Investors who wish to hold CSBs or CPBs in an RRSP can avoid

the expenses of a self-directed RRSP and take advantage of a

no-fee plan offered by the Government of Canada. Called The

Canada RSP, it requires a minimum investment of $500. If you

already hold compound interest bonds and are finding it hard

to come up with the cash for an RRSP contribution, you can

transfer your existing CSBs and CPBs “in kind” to the plan.

You can also take advantage of a payroll deduction plan for

The Canada RSP, which allows you to buy compound interest

CSBs. The minimum purchase amount is $10 per weekly pay.

As with self-directed RRSPs, contributions to The Canada RSP

are based on a percentage of annual income and are tax

deductible. The plan is available through a wide range of

financial institutions, including banks. Bond purchases that

are eligible for The Canada RSP can also be made online at

www.csb.gc.ca or by telephone at 1-888-773-9999. To qualify

for a 2004 tax deduction, RRSP contributions must be made by

March 1, 2005. For people who have already retired and have

converted their RRSP to a Registered Retirement Income Fund

(RRIF), there is also The Canada RIF, a no-fee plan designed

to hold CSBs and CPBs.