Professionals, business owners can boost retirement savings with IPPs

By , , , on September 1, 2016


In this era of financial uncertainty, with many businesses increasingly unable to fulfill their group pension funding obligations, and with defined benefit pension plans going the way of the dodo, an IPP can make a lot of sense. (Photo: Tax Credits/Flickr)
In this era of financial uncertainty, with many businesses increasingly unable to fulfill their group pension funding obligations, and with defined benefit pension plans going the way of the dodo, an IPP can make a lot of sense. (Photo: Tax Credits/Flickr)

Looking for ways to enhance your retirement savings beyond a Registered Retirement Savings Plan (RRSP)? If you don’t already have a pension plan through your employer, and you’re a business owner or executive, or an incorporated professional (physician, dentist, lawyer, accountant, and so on), you might consider the benefits of setting up an Individual Pension Plan (IPP). In this era of financial uncertainty, with many businesses increasingly unable to fulfill their group pension funding obligations, and with defined benefit pension plans going the way of the dodo, an IPP can make a lot of sense.

An IPP is basically a defined benefit registered pension plan for a single employee rather than a group. Like any group plan, an IPP pays out benefits based on a percentage of the beneficiary’s prior annual employment income, and payments and funding are governed by the terms of the plan. The plans are regulated by the government and must follow precisely specified rules, like any other pension plan.

Higher limit than RRSP

The beauty of an IPP is that the allowable contribution limit is generally much higher than for an RRSP, allowing planholders who are 15 to 20 years from retirement to accumulate a much larger nest egg than through an RRSP alone.

Like an RRSP, an IPP is an investment account that accumulates over time to provide retirement benefits. But like a pension plan, the IPP provides certain guarantees. In addition, any amounts you contribute are locked in until you retire. And like a regular pension plan, IPP contributions are determined by actuarial calculations to provide sufficient income at retirement.

Not only do contributions accumulate and compound tax-free inside the plan, but IPPs allow for past-service contributions, allowing you to get out of the starting gate with a whole lot more funding. In addition, an IPP must be funded at least 50% by the employer to qualify. The beneficiary of the IPP may also make voluntary contributions. And an IPP may provide a guaranteed level of retirement income if, under the terms of the IPP, the employer agrees to cover shortfalls arising from poor investment returns.

Creditor protection

In addition, and of particular interest to business owners, an IPP offers creditor protection should either you or your business face bankruptcy or be forced into bankruptcy protection. Under provincial legislation governing IPPs, your pension plan funding will be insulated from seizure by creditors.

Also of interest to many business professionals is the ability to participate in investment decisions in an IPP. This feature affords a level of flexibility and participation that is generally unavailable in group defined benefit plans.

An IPP also allows for a number of income options at retirement, including payment of an annual pension by the IPP, transfer of amounts to an RRSP, or the purchase of an annuity.

Getting IPP help

IPPs have much appeal for self-employed individuals, professionals, and business owner/managers. By the same token, however, IPPs are legally classified as Registered Pension Plans and are subject to fairly complex and rigorous rules governing set-up, maintenance, and funding. Beyond the actual investments in the plan, this involves things like actuarial estimates, financial statements and disclosure, costs, asset values, and liabilities.

IPPs are definitely not a do-it-yourself type of product. You need the help of a qualified financial professional to set up and administer the plan, to ensure you meet regulatory requirements for contributions, holdings, and reporting.

Courtesy Fundata Canada Inc. © 2016. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss. No promise of performance is made or implied.