Business owners and key executives with incomes above registered retirement savings plan (RRSP) limits want to be provided with periodic retirement income and build retirement assets large enough to maintain a desired lifestyle. An individual pension plan is a personal defined benefit pension plan, which may achieve the goal of building greater retirement assets.
What are the Key Benefits?
- Retirement income is known in advance, as it is a defined benefit plan
- Growth at 7.5% per annum, with valuations every three years
- Contribution amounts increase with the age of the member, subject to adjustments.
- All contributions and costs are tax-deductible to the sponsoring company
- Potential for credit protection
- Reduces payroll taxes in certain provinces
- Opportunity to keep the plan operating after age 69, if the plan is paying the retirement benefits
- The level of funding required to provide the promised retirement befits is calculated by actuaries, who follow guidelines set down by income tax regulations
- If the pension plan document permits, any plan surpluses belong to the member
- Owners of a corporation have an alternative, tax-efficient way to move funds out of their business now or in preparation of selling the business
- Possible succession planning within an incorporated family business (taxes are deferred upon death)
What you Need to Know
- Assets are locked-in until drawn for retirement income
- The plan must be funded each year by the sponsoring company to reach a growth rate of 7.5% per annum, the company carries the risk for covering deficits
- Income splitting opportunities using spousal RRSPs are diminished
- There are significant costs associated with an IPP included start-up costs, trust documents, registration requirements, triennial actuarial valuations and annual filing requirements
- IPPs are complex
Comparing an IPP with an RRSP
- Retirement income with an IPP is known in advance, since it is a defined benefit plan;
- RRSP income paid out from a registered pension plan is dependent on the performance of the investments in that plan.
- Contributions to an IPP may be larger than RRSP contribution limits
- IPP contribution schedule is calculated by actuaries and revised every three years
- Assumptions by the income tax regulations require a 7.5% annual return, which is the sponsoring corporations risk; investments in an RRSP cannot guarantee a return.
Who should consider an IPP?
- Owners of a corporation
- Key executives
The ideal plan participant should be over 40 years of age, earn an annual income of more than $100,000 and be employed with their current employer for at least 7 years.
CUSTOMIZE YOUR LUXURY RIDE TO RETIREMENT
Individual Pension Plans (IPPs)
An individual pension plan (IPP) is a personal defined benefit plan. The primary purpose of an IPP is to provide periodic retirement income to the member of the plan at a stated retirement age.