Non-Redeemable GICs Explained – Are They Still Worth It?
A Guaranteed Investment Certificate (GIC) is a popular investment instrument in Canada that stands out for its security and guaranteed return.
However, there are a multitude of options when it comes to GICs, and they may not be worth it for everyone, so much so that it is very easy to get confused when looking at these products.
In this article, we’ll be going over the most common GIC out there, the non-redeemable GIC.
What is a Non Redeemable GIC?
A non-redeemable GIC is a type of GIC that cannot be cashed in before its maturity date without incurring penalties.
This product offers investors a fixed interest rate, ensuring that the initial capital is safeguarded and the return is predetermined.
Investors choose non-redeemable GICs for the peace of mind that comes with stable and predictable growth over the investment period, which can range from months to several years.
In addition to this, they choose non-redeemable GICs because they typically offer the best rate of interest due to their relative lack of liquidity.
How do you buy a Non-Redeemable GIC?
Individuals can purchase a non-redeemable GIC through a financial institution, such as a bank like or credit union. It’s important to seek out the best GIC rates, as there are a multitude of institutions that offer GICs.
Typically, online banks have been known to offer more attractive rates of interest due to their low overhead business model.
It is also important to negotiate your GIC rates with your institution. It is very possible you could get a few more basis points in interest just by asking. It can’t hurt!
The buying process is relatively easy. It involves selecting a term for investment, during which the principal is locked in, and an interest rate that is guaranteed.
What happens when a non-redeemable GIC matures?
When the maturity date of a non-redeemable GIC arrives, investors have the option to renew for another term, often at a new rate that reflects current market conditions.
Reinvestment choices should be made with the investor’s time horizon and financial goals in mind. Some issuers may provide a grace period during which the GIC can be renewed or cashed out without penalty.
Things to consider with a non-redeemable GIC
Understand your GIC term length
GIC term lengths vary and can impact returns significantly, regardless of whether you’re choosing a non-redeemable, redeemable, cashable, or market-linked GIC.
An investor may choose a short-term GIC, typically ranging from 30 days to one year, or a long-term option, which could stretch up to five years or more. Long-term GICs generally offer higher interest rates due to the extended commitment of funds.
Term is arguably the most important thing to look at when buying a GIC, particularly a non-redeemable one.
Know your interest rate and payment frequency
The interest rate of a GIC is agreed upon at the start and remains fixed until maturity unless you buy a variable-rate GIC.
Payment of interest can occur at different frequencies, with common options including annually or semi-annually. However, suppose your term is longer than a year.
In that case, your bank may offer the ability to compound your interest, meaning it will not pay you any interest until the maturity of the GIC and instead reinvest your earnings to earn interest on your interest.
The choice of interest payment frequency may affect the compound interest earned and should match the investor’s cash flow requirements.
Know your returns
You can eliminate any surprises when it comes to the returns of your GIC by simply calculating them prior to purchasing one. Many calculators exist online today that make the process easy. However, I’ll drop the formula below anyway.
Calculating the returns on a non-redeemable GIC requires understanding the annual interest rate and the principal amount invested. The formula for calculating the returns is:
Returns = Principal x (1 + (Interest Rate / Number of Periods))^Periods
“Periods” refers to the total number of times interest is compounded within the term. An investor needs to consider the annual compounding effect when calculating returns on longer-term GICs for a precise understanding of potential earnings.
You cannot get out of a non-redeemable GIC
It is not typically possible to “get out” of a Non-Redeemable GIC before its maturity date without incurring penalties. These GICs are designed to be held until maturity, offering higher interest rates as an incentive for the investment’s illiquidity.
For this reason, paying attention to the next few points below is absolutely critical.
Make sure you select the right term
When investing in a GIC, the term is critical. However, due to the fact that non-redeemable GICs are, well, non-redeemable, it’s even more important.
The term dictates the length of time the funds will be locked in. Your term often determines the interest rate you’re paid on the GIC as well. Longer GICs will normally have higher rates of interest than short-term ones, as you’re locking in funds for a longer period of time.
Make sure you won’t need the capital
Due to their locked-in nature, the rates of non-redeemable GICs are typically higher compared to redeemable GICs or savings accounts, effectively rewarding investors for their commitment to keeping the investment untouched for the full term.
This makes non-redeemable GICs an attractive option for those looking to diversify their portfolio with a low-risk asset.
However, selecting a non-redeemable GIC requires understanding individual financial goals and the timing of cash flow needs.
You will not be able to access the money inside of a non-redeemable GIC unless you can prove significant financial hardship. And even in this situation, there would likely be penalties for you withdrawing early.
Since the funds are not accessible until maturity, they are well-suited for investors who do not require immediate liquidity. If there is any chance you may need the capital, you are best to look into products with more liquidity like a cashable GIC, or deploy a GIC laddering strategy.
Choosing an account for your non-redeemable GIC
When investing in Guaranteed Investment Certificates (GICs), individuals in Canada have the option to choose between various account types, each with its own tax implications and benefits.
Registered vs. non-registered GICs
Registered GICs are ones owned in tax-advantaged investment accounts such as the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Registered Education Savings Plan (RESP).
GICs within these accounts, like an RRSP, typically allow for tax-sheltered growth, meaning you won’t pay tax on the interest earned until it is withdrawn, or in the case of a GIC within a TFSA, not at all.
In contrast, non-registered GICs are taxable GICs where the interest earned is subject to taxation within the year it is earned. You’d hold these GICs in accounts like a cash or margin account.
There are a multitude of advantages and disadvantages to either option, so don’t always think a tax-sheltered GIC is best. I go over all of this in-depth in this article.
Common strategies with non-redeemable GICs
GIC Laddering
A GIC laddering strategy is a technique where investors stagger the maturity dates of their GIC investments. With non-redeemable GICs, this can add an extra layer of liquidity, as an investor always has GICs maturing at different time periods.
In addition to this, it can also help you earn a little extra yield by spreading out the maturity dates of your GICs.
This method not only helps to manage interest rate risk but also allows for regular intervals of access to funds, which can be redirected if better opportunities arise.
If you are interested in a full guide to GIC laddering, I provide one in this article.
Adding GICs to a diversified investment portfolio
Non-redeemable GICs can play a crucial role within a wider investment plan due to their fixed returns and protection of principal.
They fit well as a low-risk component in a diversified portfolio, offering a balance to more volatile investments like stocks, mutual funds, or ETFs.
Investors should evaluate their financial goals and risk tolerance when deciding the proportion of their investment funds to allocate to GICs.
Some who have a longer time horizon and want to take on more risk for higher returns may find no use for GICs, while someone who is close to retirement or relatively risk-averse may find them very valuable.
Overall, it just depends on your financial goals and risk tolerance.
You could consider market-linked options
For investors willing to forgo a guaranteed interest rate, market-linked GICs provide an investment option that can potentially offer higher returns based on the performance of the underlying market index or basket of assets.
It’s important to note that while the principal is protected, the returns are dependent on market performance, and there may be a cap on the maximum return. I have an in-depth article on market-linked GICs where you can learn about all of this. You can read it here.
Common questions investors have about non-redeemable GICs
What is the difference between a Non-Redeemable GIC and a Redeemable GIC?
The main difference lies in the ability to cash out the investment. Redeemable GICs allow for early withdrawal without significant penalties, while Non-Redeemable GICs do not provide this flexibility but usually offer a higher interest rate in return.
To me, I prefer allocated cash that I will never need to non-redeemable GICs over allocating cash that I may need to redeemable GICs. The reason? The bank takes a huge cut of interest on GICs that offer the option to cash out early.
Yes, you have the luxury of being able to pull out the money, but you’re paying significantly with lower interest.
What happens to a Non-redeemable GIC at death?
In the event of the GIC holder’s death, the investment typically becomes part of their estate. The funds may be transferred to a beneficiary or managed according to the deceased’s will.
Financial institutions may have their own policies in place to deal with such a scenario, and it is advisable for GIC holders to understand these details in advance.
Can you sell a Non-Redeemable GIC?
Selling a Non-Redeemable GIC is not standard practice. These investments are not typically designed to be transferrable, and any attempt to sell them before maturity may not be permitted by the terms of the GIC agreement.
Is there a penalty for breaking a Non-Redeemable GIC?
You will not be allowed to break an agreement for a non-redeemable GIC unless you can prove significant financial hardship, like not being able to pay your rent or mortgage.
If you do manage to prove this, there is often a penalty for breaking a Non-Redeemable GIC. It could be a lower interest rate or potentially even no rate at all.
Invest only money you will not need in non-redeemable GICs to avoid this problem.