Why the Canada Savings Bonds Payroll Deduction Plan is a Good Choice: the Pros and Cons
I have a long personal history with Canada Savings Bonds that dates back to the year I was born. In those dark ages before PCs, cell phones and CDs, the government used to send parents a cheque called the Baby Bonus (or Family Allowance.) This small amount of money was paid to every child in Canada, regardless of income or need. My parents, though not rich, were not needy either, so they used the Baby Bonus to buy Canada Savings Bonds for their children. In later years, I used the profits from those bonds to help pay my way through university. (Thanks Mom and Dad!) After I graduated, I started buying Canada Savings Bonds, CSBs, myself, through the payroll deduction plan at work.
I am not alone in liking the payroll deduction plan. About 95% of all CSBs are sold through this plan.
The Benefit of a Canada Savings Bonds Payroll Deduction Plan
About a gajillion financial planners have said “Pay yourself first.” Meaning, before you pay the bills and before the rest of your money vanishes in a puff of smoke (perhaps literally if you are a cigarette smoker) you should put some money away in savings. They say that if you deduct money before you ever receive your pay, then you won’t miss it. I think you may still miss it, if you have a low salary, but at least you are trying. For people in the middle salary range and higher I think they’re right.
Now you can have this “yourself” money deducted into a special bank account. It works. It’s awfully easy, though, to get access to most bank accounts. How strong is your willpower? Can you resist the urge to raid that account when temptation beckons?
The advantage of the Canada Savings Bond payroll deduction plan was that it was difficult to get at your money for about a year. In the days when I was a new hire, you couldn’t really get at it till they issued you your real paper bonds after 1 year.
Now, it is possible to get at the money during the contribution year. You have to either sign up to manage your account online, or contact the Canada Savings Bond customer support group to withdraw money. Hopefully, the hassle of doing this will provide some deterrent to redeeming early.
Other Pros of the CSB Payroll Deduction Plan
There are some other benefits:
It’s free to enroll.
There is no fee to get your money out at the end of the contribution period.
Your money is 100% guaranteed to be safe. You cannot lose your money.
You earn daily interest. You also earn (compound) interest on your interest.
You can choose how much to contribute. The minimum contribution is only $2 a week. (The maximum you can contribute per cheque is $9.999!)
You can increase your contributions once each year during the fall sales campaign.
In case of hardship, you can stop contributing at any time. You can also re-start if things improve.
Your employer decides how many times you can reduce your contributions during the year. Presumably this is to discourage you from reducing your savings.
You can include a person with right of survivorship on your plan. Basically that means if you die the bonds will pass straight to that survivor. This avoids probate fees (tax) on the value of the bonds.
You can redeem your bonds at any time. You will have to wait till 15 days after a contribution to get that specific contribution back. It will take no longer than four business days to receive a direct deposit to your bank account, or 10 business days to receive a cheque.
If you can’t contribute through your employer’s payroll deduction plan anymore (maybe they stopped offering it, or maybe you quit your job) you can arrange to continue to contribute through a pre-authorized debit program.
No bond certificates are actually issued. The account is managed online. This means you do not have to rent a secure storage box at a bank or worry about the rabbit chewing up a $200 bond.
You can access your account online almost all the time.
Bond owners receive a paper statement once a year.
Bond owners can check their interest income for their taxes online. A T5 can also be printed.
According to the government, more than 10,500 employers offer the program. The employer does not have to pay any tangible fee or cost to join the program, so you can likely get most employers to join if you ask them.
The Big Cons of the Canada Savings Bond Payroll Deduction Plan
The single biggest drawback of the program is the pitifully low interest rate currently offered on the bonds. For the 2012-2013 year, the bonds were paying 0.5% interest.
This is an unfortunate consequence of a recommendation to get rid of CSBs. The government has decided to try to get rid of them by attrition: by reducing the interest rates below those offered by banks, they hope most people will stop buying bonds. Frankly, I think this is a shameful disgrace. I want the government improve the program and offer competitive interest rates.
You Can Redeem at Any Time
The second biggest drawback is that it is now possible to redeem (or cash out) your savings at any time. While this probably improves sales, it defeats the purpose. If the idea is to encourage genuine long-term (well, at least one year long!) savings, it should be very difficult to cash out early.
Other Cons of the CSB Payroll Deduction Plan
You can reduce or stop contributing. While this is valuable in case of real financial hardship, it unfortunately can also allow someone to weasel out of their own good idea to start saving.
You cannot increase your savings rate anytime. You have to wait till the start of a new sales campaign, usually in the fall.
You can only own half a millions dollars in Canada Savings Bonds. (!)
If you cash the bonds out mid-year, you may forfeit some of the compound interest earned during that partial year.
Bond certificates are no longer issued as part of the plan. So you won’t have any attractive papers to leave on your coffee table.
- The Canada RSP
- Goodbye Canada Retirement Savings Plan, Hello ING Direct RRSP
Have you ever bought Canada Savings Bonds through a payroll deduction program? Did it help you save? Please share your experiences with a comment.
4 thoughts on Why the Canada Savings Bonds Payroll Deduction Plan is a Good Choice: the Pros and Cons
I d say another con is that, if it s not being bought as part of a registered account, you ll pay your full marginal rate on any interest. If it s outside a registered account, buy preferred shares they re lower-risk than common stock with regular, fixed payments but (check with an accountant) tax-advantaged. If you re in a registered account, buy some non-sovereign debt that pays SOMETHING lol
Good ideas to consider! I just wish CSBs would pay a decent rate of interest (they used to pay higher than GICs) because the no-fee, no-hassle payroll contribution plan is a great starting place for people with no financial experience and no tolerance for risk.
I thought you might be interested in this fact
As of the end of 2013, Canadians hold $4.46 Billion in Canada Savings Bonds, $2.07 Billion Canada Premium Bonds and are expected to buy $1.95 Billion in Payroll Savings 2013. It seems that people cash out the Payroll Savings within a year.
I suspect they are cashing them out and using the money to top up their RRSP or go on a vacation. At the ultra-low interest rate, there s almost no incentive left to keeping your money in the payroll savings plan very long. The high demand for the Payroll Savings plan does suggest people want an option that takes their money into savings before they ever see it.