Also known as a Supercharged RRSP, an Individual Pension Plan (IPP) is a registered, defined-benefit plan that offers maximum tax relief and a maximum retirement pension. These plans are commonly developed for owners of private corporations, executives of corporations, or professionals such as doctors. They are also set up for spouses of business owners if the spouse is an income-earning employee of the corporation. An individual pension plan can be an effective way of transferring registered assets to the second generation on a tax deferred basis.
How They Work
■ An Individual Pension Plan is a defined benefit pension plan essentially set up for one person
■ The plan design takes into account the member’s salary, age and years of service in order to maximize the money that can be saved for retirement, on a tax deferred basis
Why Is An Ipp The Ideal Solution?
■ The contribution room in an RRSP is determined based solely on the member’s salary, up to the maximum allowable rate and dollar limit determined by the government
■ By taking into account not only the member’s salary, but also his/her age and years of service in its design, the IPP is a more effective alternative for the unique retirement planning needs of business owners and senior executives
Who Can Benefit from an IPP?
■ Individuals over 40 who regularly earn at least $75,000 in employment income (T4)
■ Younger individuals, or lower income earners, who have eligible years of past service that they can buy back
What Need Is The IPP Designed To Meet?
For small business owners
■ Maximize tax-sheltered contributions and benefits for retirement
■ Provide ownership and protection of assets under certain circumstances
■ Facilitate the sale of the company or business succession planning
An Individual Pension Plan for Corporations
■ Enhance compensation to executives
■ Attract and retain key individuals
■ Deduct, for tax purposes, plan administration expenses
If an IPP is considered for more than one individual in the same organization, a multiple IPP solution is available that is both flexible and cost effective.
To further enhance benefits, the IPP can be combined with a Retirement Compensation Arrangement (RCA) or other supplementary executive retirement plan.
Maximum Tax Deductions
Small businesses and corporations can tax shelter thousands of dollars more in an IPP than they can by using alternate methods to contribute to an RRSP alone.
Assets held in the IPP grow and remain tax-sheltered even during retirement if the pension is paid out directly from the plan.
Years of past service with the current employer can be recognized, subject to certain conditions, resulting in additional tax-deferred contributions and retirement benefits.
Table 1 shows an example of the possible asset accumulation at 7.5% compound interest per annum using an IPP as compared to contributing to an RRSP alone up to the maximum permitted for a member aged 50 earning a salary of $140,000 per year and retiring at age 65.
Ownership Of Assets
Depending on how the plan text is worded, the IPP assets, including the actuarial surplus, if any, may become the property of the member on plan wind-up. Within certain limits, the surplus may be used to upgrade retirement benefits, although some of it may be subject to income tax. If there is a funding shortfall, it may have to be made up by the employer, depending on applicable legislation, but the additional contributions are tax deductible.
Protection Of Assets
The IPP generally provides protection from creditors in situations where the IPP is required to be registered with pension authorities and is fully subject to provincial or federal pension legislation. Seizure may apply in cases of tax recovery by tax authorities and defaults on alimony payments or compensatory allowances.
The IPP is designed to generate the most pension and ancillary benefits a registered pension plan can provide. An employee, aged 50, participating in an IPP until age 65 can expect to receive at retirement, under certain conditions, an annual pension approximately 46% higher than by using an RRSP alone (refer to Table 2).
Furthermore, depending on the circumstances, additional benefits may be provided:
■ Un-reduced early retirement pension
■ Post-retirement indexing equal to full Consumer Price Index (CPI) increases
■ Bridge benefits
Flexibility At Retirement
■ The IPP pension may be paid out directly from the plan or its value used to purchase a life annuity
■ Alternatively, the value of the benefits may be transferred into a Life Income Fund (LIF) or a Registered Retirement Income Fund (RRIF), when permitted by applicable legislation
■ Retirement can be as early as age 55 or as late as age 71
We Take Care Of It ALL
An IPP is subject to a number of statutory requirements that make it important to have the plan in the hands of an experienced service provider. At Scott Mallender Insurance, all IPP services are available in one place.