Over the past several years, business owners have started to recognize the advantages offered by Individual Pension Plans (IPPs). An IPP may provide higher retirement savings for business owners and their employees who meet specific criteria.
A pension plan with a difference
An Individual Pension Plan is a defined benefit pension plan, often set up for one plan member – typically the owner-manager of an incorporated business. IPPs may also cover other significant employees, including the owner-manager’s spouse or children if they work in the business.
Boost retirement benefits
Like a Registered Retirement Savings Plan (RRSP) contributions, which are tax-deductible to the corporation, are made to an IPP. Plan assets accumulate on a tax-free basis with the intention of providing retirement income to the plan member(s). An IPP is an ideal way to maximize retirement benefits since the amount that can be accumulated within an IPP is generally greater than the amount that can be saved within an RRSP.
The actuarial advantage
Unlike an RRSP, the amount of retirement income to be provided by an IPP is predetermined. An actuary calculates how much funding is needed to ensure the level of retirement income to be paid and the corporation makes contributions to the IPP to meet the funding obligation.
When an IPP is initially established, it may be possible for the corporation to contribute a large, initial lump sum amount in respect of the plan member’s past service. A portion of the cost of funding past service under the terms of an IPP must be first satisfied by transfers from the plan member’s RRSP assets, or a reduction in the plan member’s accumulated RRSP contribution, before new past service contributions will be permitted.
An IPP may, depending on the specific circumstances of the business owner, offer several advantages over an RRSP in a retirement strategy.
- The amount that can be contributed to an IPP on an annual basis is often higher than the amount the business owner could have contributed annually towards his or her RRSP. This is particularly true for owner-managers who are somewhat older, typically over age 40.
- This, in turn, can (at least theoretically) lead to a higher tax-deferred accumulation inside the IPP than could have been built up inside an RRSP, in turn leading to a higher stream of retirement income.
- Another advantage of an IPP is that funds may be topped-up in years of poor investment performance. According to Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Wealth Advisory Services, in an article entitled: An Individual Pension Plan can play a valuable role in a business owner’s retirement strategy: “Typical actuarial assumptions for an IPP include a 7.5% return on investment, based on current tax laws. If actual investment returns are insufficient to meet the plan obligations, the corporation may increase its contributions to the IPP to make up for the shortfall in return.”
- This can again result in higher tax-deferred accumulation inside an IPP than within an RRSP, for which no top-up is available in years when investment returns decline or result in decreased RRSP asset values.
Talk to Michael Fahy
Given the potential tax advantages, and after due consultation with a tax professional, it may well be worth considering an IPP as part of your retirement strategy. To find out more about establishing an Individual Pension Plan, please contact Michael Fahy, The Michael Fahy Group, CIBC Wood Gundy, 604-691-7207.