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Individual Pension Plans Are Coming of Age
—Is One Right For You?
In recent years individual pension plans
or IPPs have become a popular
retirement savings tool for many
executives. This is due in part to changes
in provincial pension benefits legislation
and to the active promotion of the
potential advantages of IPPs by insurance
companies and financial institutions. The
primary candidates for IPPs are business
owners, company executives and
incorporated professionals over the age
of 45 with an annual income greater than
$100,000 per year.
An IPP is a defined benefit registered
pension plan established for the benefit
of a single employee. The annual
retirement benefits funded by the plan
are defined by the terms of the plan and
are based on a percentage of the
employee’s annual employment income.
Unlike a group pension plan, the
benefits payable can be designed to suit
the needs of the individual beneficiary of
the IPP. The IPP can be funded by
employer and employee contributions or
fully funded by the employer. To qualify
as an IPP the employer must fund a
minimum of 50 per cent of the required
contributions.
The most significant advantage of an IPP
is the allowable contribution limit, which is
generally higher than the contribution
limits available under an RRSP. This
enables the plan beneficiary to
accumulate a significantly larger pool of
retirement savings than would otherwise
be accumulated using an RRSP. Other
potential advantages include:
- The ability to make pension
contributions in respect of past
employment service.
- A guaranteed amount of retirement
income if the employer agrees to fund
additional contributions should the IPP
realize poor investment returns.
- Participation by the employee in the
investment decisions made by the IPP.
- Protection from creditors of both the
employer and the employee (under
provincial pension legislation).
- Multiple retirement income options
(annuities may be purchased from an
insurance company, funds may be
transferred to an RRSP or the IPP may
pay an annual pension).
Although the advantages related to an IPP
are significant, there are several
disadvantages that must be fully
considered:
- Unlike an RRSP, the funds will be
locked in and access will be restricted
until retirement.
- It is not possible to split retirement
income by making a contribution to a
spousal plan, as is the case for a
spousal RRSP.
- Defined benefit plans have extensive financial statement disclosure requirements,
and determining annual pension costs, asset values and liabilities is complex.
- Set-up costs and annual operating
costs are significantly higher than those
associated with an RRSP (an IPP
requires an actuarial valuation on set-up
and every three years thereafter).
An annual filing with Canada Revenue
Agency is required for IPPs. However, in
recent years the market for IPPs has
become more competitive and the costs
associated with establishing and
maintaining an IPP have been reduced.
Is an IPP right for you? The answer will
depend upon your particular
circumstances. You should consider
reviewing the IPP option if you are within
15 to 20 years of retirement, have an
annual income of over $100,000 and
anticipate retiring with your current
employer.
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