Individual Pension Plans (IPPs)
An individual pension plan (IPP)Individual pension plan (IPP) A retirement savings plan that allows bigger tax-deductible contributions than an RRSP. It is designed for people with higher incomes. It works like a defined benefit plan and must follow Canada’s pension plan rules.+ read full definition is a DB pension plan for one person, typically the owner or an executive of an incorporated company. Typically, the company makes all contributions.
Advantages of IPPs
- Potential for greater taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-sheltered savings: The maximum contributionContribution Money that you put into a savings or investment plan.+ read full definition to an IPP each year can exceed the amount an individual can contribute to an RRSPRRSP See Registered Retirement Savings Plan.+ read full definition on their own, especially at later ages (age 50 or older).
- CreditorCreditor A person or institution that lends money. To borrow from a bank or finance company, you must sign a legal contract that gives them the right to claim your car, home or other assets if you don’t pay back the loan.+ read full definition protection: Like other DB benefits, IPP benefits are fully protected from creditors. RRSP savings may not be.
Disadvantages of IPPs
- Minimal RRSP contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition: IPPs are designed to maximize tax-sheltered benefits, so the individual’s RRSP contribution room each year is reduced to near zero by a pension adjustment (which equals the value of the IPP benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition earned in the previous year).
- Less flexible retirement income optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition: Provincial and federal pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition laws apply to IPPs – and can restrict flexibility in retirement income planning.
- Cost and complexity: IPPs have higher set up costs and greater complexity than RRSPs, with the need for ongoing administrative tasks such as annual reporting and regular actuarial valuations.
Maximizing IPP benefits
To maximize the benefits of an IPP, the owner or executive typically:
- is in their 40s or 50s when the IPP is set up, to ensure that IPP contributions can exceed the amount the individual could save on their own through an RRSP, and
- has a high annual salary ($100,000 or more), so that the company can maximize its IPP contributions.
Because of the complexities of an IPP, you may want to get professional advice to determine if an IPP is an appropriate strategy for you.
Funding IPPs for past service
A company can fund an IPP to provide a benefit for the owner’s or executive’s previous years of employment with the company. However, the cost of this must first come through a transfer of the individual’s RRSP and DC pension plan savings – plus a reduction in any unused RRSP contribution room – before the company can contribute to fund this benefit.
IPPs are a complex retirement savings strategy – consider professional advice from a reputable advisor before setting one up.