Individual Pension Plans (IPPs)

Are you an incorporated business owner or professional receiving T4 income while contributing to an RRSP?

If so, you may want to consider an Individual Pension Plan (or IPP).

An IPP is a defined benefit pension plan your company can set up for you.

An IPP is ideal if you’re between the ages of 40 and 71, earning T4 income, and have owned your company for several years.

With an IPP, you can make higher annual contributions than an RRSP...

...and gain the ability for your company to make a large tax-deductible past- service contribution.

In addition, the company can make a top-up contribution if IPP assets fail to grow by 7.5% per year with adjustments.

Here’s a chart showing a comparison of IPP funds versus RRSP funds for someone who is 50 years old, with 23 years of past service.

As you can see, the ability to make a large past-service contribution, along with the increased annual IPP contributions, result in a higher registered plan balance.

While IPPs do involve more complexity and have higher annual fees than RRSPs, the fees are fully tax-deductible.

This video is provided by RBC Wealth Management for informational purposes only. The comments contained in this video are general in nature, and do not constitute legal, investment, trust, estate, accounting or tax advice. RBC Dominion Securities Inc.*, Royal Trust Corporation of Canada, The Royal Trust Company, RBC PH&N Investment Counsel Inc., RBC Wealth Management Financial Services Inc. are affiliated corporate entities and member companies of RBC Wealth Management, a business segment of Royal Bank of Canada. *Member – Canadian Investor Protection Fund. Please visit www.rbc.com/legal/ for further information on the entities that are member companies of RBC Wealth Management. ®/TM Trademark(s) of Royal Bank of Canada. Used under license. © 2020 Royal Bank of Canada. All rights reserved.

Individual Pensions Plans (IPPs)

Retirement planning for business owners & incorporated professionals

RRSP contribution limits make it hard for above-average income earners to save tax-efficiently for retirement. An Individual Pension Plan (IPP) can be an effective strategy that helps you maximize your retirement funding and reduce business taxes.

An IPP is an employer-sponsored Defined Benefit (DB) registered pension plan set up for an individual and designed to provide maximum retirement benefits and tax-sheltered contributions. IPPs are ideal for:

Business owners, incorporated professionals, or key employees such as senior executives who need to boost their retirement savings.
Individuals with T4 income of $141,000 or more.
Individuals between the ages of 40 and 71.

A spouse who is an employee of the same sponsoring company can also be included as a plan member.

If you would like to learn more about the benefits of IPPs, including enhanced tax-sheltered growth, creditor-protected savings and tax-deductible contributions for your business, contact us today.

IPPs are ideal for individuals who want to contribute more to a tax-sheltered retirement plan than what’s currently permitted by Retirement Savings Plans (RSPs).

HOW THEY WORK

IPPs are established for eligible individuals using a customized model. A Statement of Investment Policy and Procedures (SIP&P) is drafted, outlining how the pension funds will be managed. As with any DB pension plan, the pension income is calculated according to a formula based on a number of factors, such as years of service and salary levels. The employer is responsible for providing guaranteed income, regardless of the investment climate.

As a DB pension plan, the IPP must provide a lifetime retirement pension for the employee. An actuary engaged by the sponsoring company will determine the contributions required in order to fund the promised pension benefit.

An actuarial valuation must be completed at least once every three years.

If the IPP participant retires before age 65, additional contributions can be made to the IPP to fund early retirement benefits. Depending on the actual retirement age, the funding of these benefits may help to reduce any surplus in the IPP or allow for additional tax-deductible contributions to the IPP.

Pension benefits become "locked-in" in most jurisdictions, and legislation requires that locked-in money is directed in such a way that maintains an income stream for the individual’s retirement years. Pension benefits can be paid directly from the IPP funds. Alternatively, if the IPP is terminated, the IPP funds may be transferred to a Locked-In Retirement Account (LIRA) – or in some cases, to an RSP – to accumulate until age 71, or used to purchase an annuity.

AN ATTRACTIVE OPTION

IPPs are a valuable retirement tool ideal for incorporated business owners and professionals looking for additional retirement income. They provide a safe way to make higher contributions than permitted by Retirement Savings Plans (RSPs), while enjoying the same tax advantages. IPP contributions are tax-deductible and grow within the plan on a tax-deferred basis – just like an RSP.

Here are some of the intriguing advantages of an IPP:

■ As a DB pension plan, retirement income is defined and predictable.

■ IPPs help maximize retirement benefits since the amount that can be accumulated within an IPP is greater than what can be accumulated within current RSP contribution limits.

■ Investments grow on a tax-deferred basis, meaning you don’t pay any tax on investment income generated within the plan until you actually start receiving payments. Typically, this results in much greater growth over time.

■ IPPs allow individuals whose investments have not done well to make additional tax-deductible contributions. This ensures that the pre-determined pension can be paid, whereas RSP investment losses cannot be made up.

■ Lump sum contributions can be made for past service back to 1991 (or before, if certain conditions are met).

■ Contributions to the IPP and the fees to set-up and administer the IPP are tax deductible by the employer.

■ Employer contributions to the IPP are not considered a taxable benefit for the employee, and are not subject to payroll taxes.

■ If the employer needs to borrow funds in order to make IPP contributions, then the cost of borrowing is also tax deductible.

HOW CAN WE HELP?

Establishing an IPP can greatly enhance retirement benefits, but it can also be very complex. That’s where our team of professionals can help – by making it easy to establish an IPP that’s right for you. Please contact us today if you would like to explore the IPP for your personal situation.

Please see our FAQs page for further detail on the IPP solution.