Individual Pension Plan (IPP)
What is an Individual Pension Plan (IPP)?
An Individual Pension Plan is a corporately funded defined benefit pension plan set up for a business owner, professional with a professional corporation or a key employee.
Who is the ideal Individual Pension Plan candidate?
A business owner of an incorporated company, a professional with a professional corporation, or a key employee between the ages of 40 and 71 are viable candidates for an Individual Pension Plan.
The plan member must be receiving T4 remuneration which is reported on a “T” slip. Employee Profit Sharing Plan income qualifies. Dividend income does not qualify as pensionable earnings therefore cannot be used for the purpose of the pension plan.
If the spouse is also on the payroll, he or she can be included as a plan member of the Individual Pension Plan.
What if I am not a high income earner?
Most information you read on IPPs states the ideal candidate must be earning at least $150,000 per year. The ongoing current service contributions are based on a percentage of current year T4 remuneration from the sponsoring employer. If the plan member is over age 40, this percentage is higher than 18%, therefore is higher than the RRSP limits. Whether you are earning $150,000 or $60,000, the contribution limits available in the IPP will exceed those available under the RRSP. Therefore, it is not necessary to be earning $150,000+ to experience the benefits of an Individual Pension Plan.
What are the features of the Individual Pension Plan (IPP)?
The Individual Pension Plan (IPP) allows the plan member to accumulate more wealth than a Registered Retirement Savings Plan (RRSP) for two reasons.
- The Individual Pension Plan allows the opportunity to fund past service benefits from the later of 1991 or date of incorporation even though RRSP contributions have been maximized during that period.
- If the plan member is over age 40 and is an active member of an IPP, the ongoing annual current service contributions will be higher than the contributions available under a Registered Retirement Savings Plan (RRSP). As the plan member ages, the permitted annual current service contribution increases.
Unlike an RRSP, in times of economic uncertainty, the Individual Pension Plan allows the plan member to “top up” contributions with additional corporate funds if investment returns are insufficient to provide the promised benefit.
All contributions are made by the company and are a corporate deduction. All professional fees associated with the pension plan are a corporate deduction.
The assets of the pension plan are creditor proof.
What Happens Upon Retirement?
The plan member may elect to commence pension payments anytime from age 50. One or a combination of the following vehicles may be selected to provide an annual pension:
- Life Income Fund (LIF): the LIF is an RRIF, except that maximums are imposed on annual withdrawals. In several jurisdictions, all or a portion of LIF assets may be unlocked.
- Annuitization: a lifetime annuity may be purchased from a life insurance company.
- Direct Payment of Pension: should the decision be taken not to collapse the IPP upon retirement, pension payments may be made directly to the pensioner.
Under the LIF and direct payment options, investment control is maintained and, upon death of the pensioner, any residual assets pass to the beneficiaries.
What Happens Upon Plan Termination?
The pension plan assets will the transferred to a locked-in RRSP or Locked-in Retirement Account (LIRA) subject to Income Tax Act prescribed maximums.
The assets may continue to accumulate in the LIRA on a tax deferred basis without the requirement to make withdrawals until the end of the calendar year the plan member attains age 71.
There are several techniques available to permit an additional corporate deductible lump sum contribution upon plan termination.
What Happens Upon Death?
Pension legislation dictates if there is a spouse upon the plan member’s death, the spouse is automatically the beneficiary of the pension plan. In some jurisdictions, the spouse can waive their entitlement and a beneficiary can be appointed.
Upon the death of the plan member, all assets of the IPP are available to be transferred to the spouse on a tax free basis.
If there is no spouse upon the death of the plan member, all assets of the IPP are available to be paid to the named beneficiary or the estate.
If the surviving spouse is a member of the pension plan and continues to receive T4 remuneration from the sponsoring employer, the spouse may continue to participate in the pension plan and the value of the death benefit may remain the plan.
Where Are The Funds Invested?
There are three options available as to where the funds are invested:
- a corporate trustee
- a life insurance company
- a self directed trust, naming three individual trustees, one of whom must be at arm’s length
Who Manages The Pension Fund?
The plan member and or the company work closely with an investment advisor to determine the investment strategy. McFarlane Amerlee is the actuarial firm responsible for the ongoing actuarial and administration services of the pension plan, we are not involved with the management of the pension assets.
The plan may be managed like a self directed RRSP. Generally, if an investment is RRSP eligible, then it is IPP eligible.