The Ups and Downs of Escalator GICs - Winter 2005

At first glance, the escalator GIC rates promoted by many banks and credit unions may look attractive - particularly since rarely these days is a 6% plus return associated with a guaranteed investment.

Bear in mind however, that what seems too good to be true often is, says Cynthia Duncan, financial planner at Rice Financial.

"Smoke and mirrors can often make an otherwise hum-drum product appear stellar," Duncan says.

Also known as stepped, rateriser or accelerator GICs, escalator GICs offer an increasing rate of interest over a succession of years. Generally available for three and five-year terms, they are designed as long-term investments and can not normally be cashed before maturity, or a specified anniversary date (some allow conversion to a regular GIC on the second, third or fourth anniversary).

Indeed, as in the example on this page, the interest does appear to escalate each year. But what the glossy promotions fail to emphasize is the average annual compound rate, or the rate you will actually receive after the full term - in this case 3.59%.

As of the date of publication, Rice Financial's top posted rate for a regular five-year GIC is 4.0%, Duncan says.

Furthermore, whether you choose to have interest on escalator GICs paid annually or compounded to the end of the investment term, the interest earned will be calculated annually and must be claimed each year on any tax filings as interest income.

"If you've opted for compounding interest, this creates a situation where you are paying taxes on interest you have yet to receive," says Duncan.

When you peel away the layers and start comparing apples to apples, you will likely find alternatives that deliver better returns than escalator products with fewer strings attached, Reid adds.

Avoid being taken for a ride: consult your Rice Financial advisor and view escalator advertising with caution when shopping for the best fixed-term option.