What is an Individual Pension Plan (IPP)?
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Published on
April 11, 2024
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As a business owner, we want you to feel confident about your retirement. An IPP is a defined benefit pension plan that allows you to increase your retirement savings and establish long-term financial security.
How an IPP works
An IPP is similar to an RRSP in that it uses an investment account to accumulate assets over time as retirement benefits. However, unlike the RRSP, an IPP allows for the accumulation of greater assets – up to 65% more than an RRSP, and like a traditional pension plan, sets your monthly income at retirement. An IPP also provides certain additional guarantees beyond an RRSP to further protect your financial future. Assets accumulated within an IPP are locked-in and may be used only for retirement purposes.
How are IPP contributions calculated?
IPP contributions are determined by a series of actuarial valuation reports in order to ensure you have sufficient assets at the time of your retirement. Your annual income at retirement age is calculated using:
- Your career T4 and T4PS earnings
- Your age
- Assumptions determined by the actuary, which are acceptable to Canada Revenue Agency (CRA)
Are you a good candidate for an IPP?
An IPP is specifically designed for a business owner of an incorporated company, an incorporated professional or executive, age 40 and over, ideally earning $100,000+.
An IPP is NOT well suited for:
- Sole proprietors and partners of partnerships
- Business owners who rely on dividends and compensation other than T4
- Highly cyclical businesses
What happens when you retire?
Once you retire you will have a choice of retirement vehicles. These include a monthly pension from the plan, an annuity, a Life Income Fund (LIF), or a Locked-In Retirement Income Fund (LRIF).
Key Benefits of an Individual Pension Plan:
- An excellent way to increase your retirement assets and have your company make large tax deductible contributions
- Allows for significant additional tax deductible contributions at inception and retirement
- Safer investment rules and limitations compared to the RRSP
- Allows for additional tax-deductible contributions to be made by the company should the rate of return on plan assets be less than 7.5% a year
- Pension plan surpluses belong to the member
- Pre-determines retirement benefits
- 100% creditor proof
- No deemed disposition of plan assets upon death in certain situations. Plan assets remain in the plan to provide benefits to surviving members
- All costs associated with the pension plan are tax deductible to the company.
Final things you need to know:
- Assets within an IPP are locked-in and can, in most circumstances, only be withdrawn during retirement.
- There is little contribution flexibility – Shortfalls in asset values normally require further contributions to put the plan back on track. This tax-deductible additional funding can be made over several years.
- IPP will reduce or eliminate RRSP room in the year of setup, and in most situations, new RRSP room will be limited to $600 per year moving forward.
\Talk to Statera Financial Planners today and see if an Individual Pension Plan is the right strategy for your retirement!