In Scott Adams’ delightfully nihilistic portrayal of corporate life, our impotent hero Dilbert shares the sketchpad stage with a deeply sarcastic crew of personalities. I’ve known each of them personally for the past 29 years, and not just through the funny pages. I’m nearly certain Adams has been hiding in the walls, whispering lines to my pointy-haired boss.
Some of his more pernicious characters are personified animals, but in the case of the accounting staff, animal-ified humans…ish. “The “trolls” in accounting live in the dark flame-lit basement, where they grunt curmudgeonly displeasure at people and numbers alike.
Rumour has it that some of these trolls have joined the firm of “Scrooge, Marley and Morneau” and taken up residence in a stately Ottawa office, where they study ways to make life hard for business owners nation-wide.
In their recent budget policy, they touched on, but have not yet ruined the concept of the Individual Pension Plan, (IPP).
Essentially, an IPP is a way to move money out of a private corporation in a more tax-friendly way, contingent on the company being sufficiently prepared to commit to a pension plan. It’s a way of trying to level the playing field, pension-wise, between you and the guy who worked for a large corporation or a government agency and generated a comfortable pension there.
Who can open an IPP?
IPPs are designed for incorporated small business owners, incorporated professionals, and senior executives (if the company is prepared to commit to the concept).
Ideally the candidate will be between the ages of 40 and 71, will have been incorporated since 1991 and have T4 income since the date of incorporation. This will create eligible years of past service, like RRSP room but bigger. This allow individuals approaching retirement to compensate for the years when corporate revenue was largely reinvested in the establishment and growth of the business.
Benefits of an IPP
The significant advantages of an IPP versus a Registered Retirement Savings Plan (RRSP) include:
• More retirement savings. IPP contributions for individuals 40 and over will be greater than the maximum allowable RRSP contributions.
• Predictability. Because they are governed by defined benefit (DB) pension funding rules, the outcome is more predictable, which is of course the whole point of a DB pension.
• Tax efficient. All IPP contributions, actuarial and investment management fees paid on a member’s behalf are fully tax-deductible corporately. For the individual, the company IPP contributions are an excellent non-taxable benefit
• Investment growth is tax deferred until withdrawn at retirement.
• Pension income can be split sooner with a member’s spouse -- as soon as payments begin (as opposed to age 65 for RRSPs).
• Greater control of outcomes. Not only is the end benefit prescribed with an IPP, but so is the annual return inside the pension. To the extent the IPP does not attain the 7.5% benchmark, the sponsoring company can make a tax deductible contribution to “bridge the gap” between this prescribed rate and actual performance. It’s a pension fund of one, so the disadvantage of not having pooled resources is made up for with this additional flexibility. Thus, a return of 7.5%, on a tax-assisted basis, is assured. And the top-up to bring your return from say 4% to 7.5% is not counted against deduction limits.
• Security. The assets held in an IPP may offer potential protection from creditors>
• Past service contributions. An IPP has the ability to make tax-deductible contributions reflecting the member’s service with the company as far back as 1991 or the member’s date of hire.
• Additional contributions at retirement. The Income Tax Act prevents the pre-funding of certain ancillary benefits while business owners are active employees. However, at retirement, these benefits can be fully funded. That means another large tax-deductible contribution can be made at retirement, if desired.
• Retirement options. Typically, when the participant retires, either the company becomes inactive or has been sold, in which case there is no longer an active plan sponsor. Although the participant can choose to receive the pension directly from the IPP, it is more common to wind up the IPP at retirement and transfer the value to another registered plan such as a Life Income Fund, Locked-in RRSP or an insured annuity.
Before establishing an IPP
While an IPP offers several advantages, there are also some hurdles to take into account, including:
• Complexity of the plan. An actuarial valuation is required at the time the IPP is set up, and every three to four years thereafter, depending on the province.
• Reduced RRSP contribution room, and restrictions on contributing to a spousal RRSP once your IPP is established.
• Potential additional contributions may be required if your investment returns are too low, as noted above. Therefore, the corporation needs to be sufficiently flush.
• Ongoing costs. Annual IPP administration fees are higher than those for an RRSP due to the IPP’s complexity. Actuarial evaluations must be conducted in BC every 3 years. And annual fees for this run in the low 4-figure range.
• As it falls under Pension Plan legislation an IPP has Locked-in Features, meaning emergency access to large lump sums is restricted.