Manulife IncomePlus: The high cost of peace of mind

November 3, 2008


Manulife IncomePlus is a Guaranteed Minimum Withdrawal Benefit (GMWB) type of variable annuity product aimed at people who are about to retire or in their early retirement years. It guarantees an income stream for the lifetime of an annuitant and a withdrawal balance and comes with a reset feature that could potentially increase the balance (and the income stream) based on the performance of an underlying fund. This Manulife brochure offers examples of how the product works.

IncomePlus has become very popular, attracting more than $5 billion in deposits since its launch about two years back. The downside protection offered by minimum withdrawal guarantees and the upside potential offered by market growth (and, it must be mentioned, hard sell by financial advisors) could explain its popularity. Other providers such as SunLife and Desjardins have launched similar products.

It is hard to see how these products are better than low-cost, diversified portfolios that have a large fixed-income component suitable for someone at or near retirement considering that the income stream is not indexed to inflation. The fees for these products are extra-ordinarily high: a 0.25% to 0.75% fee for IncomePlus in addition to a MER in the range of 2.75% for the mutual funds on offer. Does anyone believe that the upside potential of market growth will amount to much when paying 3.5% in fees every year? Why then are advisors pushing their clients to buy these products?

Beware of tax shelter donation arrangements

August 19, 2008


Recently a friend asked about a “tax scheme” that claims to buy medicines for AIDS patients (“Fight AIDS Save Taxes” is its slogan) in Africa and provides a tax receipt for four to five times the donation amount. While stiffing the government, helping AIDS patients and putting some money in the pocket may sound like a win-win situation all around, participating in a tax shelter scheme is asking for trouble. The Canada Revenue Agency has a clear position on these schemes and titled a recent alert, “Warning: Participating in tax shelter gifting arrangements is likely to result in a tax bill!” The text of the alert also provides no room for confusion:

New schemes are being marketed that claim to be different from those for which the CRA has previously issued warnings. Taxpayers should avoid all schemes that promise donation receipts for 3 to 4 times the cash payment. It is the CRA’s position that the proposed legislation, effective since 2003, will apply to reduce the donation credit to no more than the actual cash payment. Furthermore, as indicated above, completed audits have shown that there was effectively no gift being made in many cases, and as a result, the donation was reduced to zero.

The Toronto Star ran a series of investigative pieces on charity scams last year available here, here and here. An accompanying graphic to the story illustrates the risk involved in these schemes. A taxpayer made a donation of $10K and received a tax credit of $21K (probably adjusted for the original donation), got audited and the taxman wants $35K in back taxes, interest and penalties. Despite the CRA warnings and media coverage, it appears that many are falling for these schemes — the aforementioned “charity” claims to have raised $165 million so far.

Is a Costco membership worth it?

May 26, 2008


Yesterday’s post elicited a comment from a reader who wondered if it’s worth joining Costco because their prices aren’t always the cheapest and they offer a limited selection of merchandise. We have been Costco members for more than 10 years now and looking into Microsoft Money reports, we have spent more than two-and-a-half times at Costco than at the next highest retailer. Our purchases at Costco run the entire gamut – a furnace, a flat-screen TV, a bar fridge, automobile tires, furniture, diapers, over-the-counter medicines, groceries like milk, butter, olive oil etc.

The main reason to shop at Costco is the price – they simply have the best price on many of the items that we regularly buy and if you stock up on essentials like laundry detergent, soap, tooth paste and razor blades when they give out coupons, their prices are almost unbeatable. It is not simply anecdotal reports that bear out their low prices. A quick perusal of the financial reports for Costco and its competitors bears this out. Costco’s gross margins (net sales – merchandise costs / net sales) at 12% are lower than Wal-Mart’s 24% and Home Depot’s 34%.

Despite a regular membership that costs $55, shopping at Costco is likely to save money for most people. In fact, we have an executive membership that costs $100 and provides 2% cash back on most purchases. We shop enough that we’ve been getting back the entire membership fee for the past couple of years.

Another reason we really like Costco is their generous return policy. It’s true that they tightened up their policy on computers and electronics to 90 days but that’s still very generous compared to speciality electronics stores. We’ve bought books that remained unopened for months and didn’t have a problem returning them for a full credit.

It is true that Costco has a limited selection. If you prefer Pampers and loathe Huggies, you’re out of luck as Costco only carries the latter. But, we never found this to be a limitation and simply buy the brand or model we like at other retailers. In my opinion, for our household shopping, there are only two minor disadvantages to Costco: (1) As Costco carries many items for a very limited time, we tend to pick up goods that we really didn’t intend to buy. Costco shoppers should also guard against buying something, especially perishables, just because it is on sale. (2) The two local stores that we frequent are extremely busy on weekends and the aisles are packed with shopping carts. Still, the checkout lines move fast unlike other retailers like Wal-Mart.