PanFinancial Individual Pension Plans

IPP (Individual Pension Plan)

Owners of a corporation and key executives face a problem most other employees do not. How can they arrange to be provided with periodic retirement payments and build assets large enough to maintain the same lifestyle upon retirement when the rules governing registered retirement savings plans (RRSPs) and registered pension plans (RPPs) restrict them? Owners of a corporation may have the additional problem of trying to move funds out of the business tax efficiently.

What is an IPP?

An IPP is a personal, defined benefit pension plan, with benefits taxed upon receipt to the member (the member receives the retirement benefits, also known as the annuitant). The primary purpose of an IPP is to provide periodic retirement payments, at the stated retirement age, to the member(s). The plan allows for the potential to accumulate a greater amount of assets than in an RRSP. In order to meet the promise of a specific level of periodic pension payments at retirement, plan contributions are determined by an actuary. Contributions are made by the plan sponsor (the

corporation), and all expenses for setting up and funding the plan are deductible by the plan sponsor. The plan has potential creditor protection, and is governed by more prudent investment rules than an RRSP. The IPP is subject to provincial pension legislation and the Income Tax Act.

How does an IPP work?

The plan promises the level of retirement benefits and an actuary calculates the required annual contributions to meet the obligation based on assumptions set out by the Income Tax Regulations, similar to other defined benefit plans. Factors included:

Career T4 slips or pensionable earnings
Age of member
Retirement at age 65
7.5 per cent annual rate of return
5.5 per cent annual salary increase
Post-retirement pension increases equal to Consumer Price Index (CPI), less one per cent

The assumption is that annual contributions, compounded at a 7.5 per cent annual rate of return, will be earned to ensure there will be adequate assets to provide benefits at the retirement age. A valuation must be completed every three years by the actuary to ensure the plan stays on track. Shortfalls in plan assets require larger contributions, while surpluses may require a lower contribution, or even a “holiday.” A powerful advantage of an IPP is the use of past service benefits as far back as Jan. 1, 1991 in certain circumstances. This past service pension can add up to tens of thousands of dollars in additional tax-deductible contributions. In other words, the member who had no other pension entitlement for the period catches up with contributions that are deductible by the corporation. A qualified transfer of existing RRSP assets are also rolled over into the IPP and often must be made to avoid a past service pension adjustment, which may create negative RRSP contribution room.

What are the key benefits of an IPP?

An IPP provides the member with the opportunity to increase assets available to draw on at retirement through a tax-deferred plan, although it does not permit retirement income beyond the limits of other defined benefit plans. Benefits are pre-determined by actuaries, who follow guidelines set down by the Income Tax Regulations. Other attractive benefits include:

Amount of retirement income is known
Guaranteed growth of assets at 7.5 per cent per annum
Potentially larger deductions by the company, with all costs tax deductible to the company
Potential for creditor protection
The opportunity to keep the plan operating after age 69, if the plan is paying the retirement benefits
Possible succession planning within an incorporated family business (taxes are deferred upon death), by setting up a single plan for family members working in the business
If the pension plan document permits, any plan surpluses belong to the member
Potentially requires an additional tax-deductible contribution at early retirement
There are significant costs associated with an IPP, including start-up costs for establishing the plan and trust documents, registration requirements, triennial actuarial valuations, and annual filing requirements with CRA and the provincial pension regulator
IPPs are complex, increasing the possibilities of misunderstandings by clients and between various parties

Who should consider an IPP?

Owners of a corporation, key executives and professionals with professional corporations are in a position to benefit from an IPP. Business owners tend to be looking for alternatives to move funds out of their incorporated company tax-efficiently. Or, they could be looking for ways to move funds in anticipation of selling the business to maximize after-tax proceeds.

Members should be:

Over 40 years old and earn an annual income greater than $100,000, since this is the approximate minimum criteria where actuarial calculations show it makes sense to set up an IPP compared to other retirement plans
Employed by their current employer for at least seven years, since evidence of stability with the company provides a margin of comfort for the company The company must also be incorporated and have employees. Sole proprietorships, partnerships and self-employed businesses are not eligible. A member can set up a family IPP with his or her spouse and/or child(ren), if either are employed by the same business.

A 60-year-old able to contribute the maximum $32,371 in 2008 would see the yearly IPP contribution amount rise eventually to $57,773 at age 69 in the year 2016. In the same period, the person with maximum RRSP room would contribute $19,000 this year, $20,000 in 2008 and eventually $30,335 in 2016. Assuming normal investment growth of 7.5% a year and full recognition of past service back to 1991, the IPP ends up with roughly $1.565 million, almost 70% more than the estimated $923,000 the RRSP would accumulate.

For more information please contact Richard Segal at 416 987-4514 or rsegal@panfinancial.com