Executive Summary
An Individual Pension Plan (IPP) is an employer sponsored defined benefit plan. IPP’s can be useful tax and retirement planning tools for incorporated business, executives, and professionals. Below is a brief overview of some of the benefits this unique retirement plan can provide.
What You Need to Know
What Are IPP’s?
IPP’s are defined benefit pension plans that are designed to supplement the retirement of high-level executives, professionals, and business owners. The employer sponsoring the plan is 100% responsible for funding the plan based on actuarial assumptions reported every three years. Unlike defined contributions pension plans where the contributions determine the benefit, an IPP’s benefit determines what the contributions will be. IPP’s allow for higher contribution room than a traditional RRSP. This makes them very attractive to high income earners as they still have all the same tax benefits of an RRSP and there are a wide variety of investment options available within the plans. All of the contributions to the plan are tax deductible and the contributions are not considered to be a taxable benefit to the employee. Also, unlike traditional investment vehicles, the set up and administration fees associated with IPP’s are deductible to the employer.
Who Might Benefit From an IPP?
IPP’s are ideal for incorporated business owners or executives that receive T4 income from a corporation, are between 40-71 years old, and have a T4 income over $100,000 per year. Companies may offer IPP’s as an incentive to keep key employees to provide them with retirement benefits outside what an RRSP will allow.
IPP’s are becoming more popular for small business owner as well, and with good reason. Many business owners plan to fund their retirements with the company money without considering the massive taxable event that could occur with lump sum withdrawals at the time of retirement or upon the sale of the business. IPP’s offer a solution to this problem. An IPP is funded by the corporation’s dollars, therefore taking surplus cash out of the company in a tax efficient way and setting it aside for the business owner to withdraw over time, which spreads out the tax burden associated with the withdrawals.
IPP’s also offer business owners security in their retirement. As defined benefit pensions, IPP’s are required to provide income to the employee for life. The money is typically locked in and as mentioned above, the company is required to fund it. This type of “forced” savings is beneficial to business owners who may have a tendency to dip into surplus cash and personal retirement savings to make business moves and investments.
Other Considerations
IPP’s are extremely complex from an actuarial and administrative stand point, and therefore they are subject to ongoing administrative fees. They are also somewhat inflexible. The contributions are mandatory and predetermined. Once the plan has been funded there is little to no flexibility in how and when the money can be withdrawn. This may be a disadvantage to some business owners who do not have reliable cash flow into their business and regularly require additional cash.
IPP’s also offer the opportunity for additional contributions (also known as terminal funding), to the company at the time of the employee’s retirement. This optional contribution can be made to fund a bridge benefit or subsidize an early retirement. How these contributions are calculated are beyond the scope of this article, but if done correctly it can be an attractive benefit to business owners.
The Bottom Line
IPP’s are a specialized and beneficial retirement savings option for high income earners and incorporated small business owners. While they can be complicated to maintain, many times these tasks are left in the hands of the companies who administer the plans in the first place and these complexities are far outweighed by the benefit that IPP’s can offer to the right individual.
