Individual pension plans (IPP's) are an attractive alternative to RRSP's for the right clients. Already accounting for nearly 40 per cent of the 6,500 private pension plans in Canada, this type of defined benefit pension plan's popularity is on the rise and is expected to double its numbers in the next three years.
There are several reasons you may want to consider an IPP. Perhaps most important for people over 40, IPPs offer higher tax-deferred contributions than RRSPs. Furthermore, any surplus in the plan belongs to you. This is an advantage IPPs have over other pension plans, where any surplus stays in the fund and is used by the company to pay for benefits for other members of the plan.
That said, an IPP does require the services of experts and is therefore associated with higher fees than a self-directed RRSP covering everything from setup to ongoing administration, actuarial services and trustee services, where applicable. In most provinces, the IPP is registered with the provincial pension authorities and they also require annual fees. In addition, pension legislation requires that the assets be locked in except in Saskatchewan, Quebec and Prince Edward Island. This means there is generally no access to the funds in the plan until retirement - and even then you can only withdraw an income stream.
Nonetheless, for many the advantages offered by IPPs far outweigh the disadvantages. Specifically, to hold an IPP, you must:
- Have employment income reported on a T4;
- Be an employee of an incorporated company; and
- Be age 40 or older and earn an income of at least $75,000 from the company sponsoring the IPP.
Know The Facts - Before you decide whether or not an IPP is a suitable strategy for you, you need to be aware of the pros and cons.
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IPP Advantages |
IPP Disadvantages |
| Employees over age 50 enjoy an annual maximum contribution that is at least $6,000 higher than the maximum contribution for an RRSP. | Unlike RRSPs, pension plans do not allow for income splitting - you cannot make spousal contributions to a pension plan. |
| When an IPP is established, past service contributions enable you to catch up for the previous years you worked for the company. Past service contributions are calculated on each of your years' annual earnings gong back to the company's creation, the date you started working for the company, or January 1, 1991, whichever is most recent. For companies with excess cash, this is a great opportunity to move from the company to a tax-sheltered IPP. For companies without surplus cash, past service obligations can be amortized up to 15 years. | Initial setup fees* can be as much as $3,000 and will increase if past service benefits are provided. Annual expenses and filing fees after the first year will average $1,000 or more, including an actuarial report every third year. |
| Guaranteed lifetime income - the IPP offers predictable retirement income. An actuary determines the annual contributions required. | Any surplus that is not required to pay for the promised benefits is paid to the member in a lump sum and is fully taxable. |
| Pension benefits are protected from creditors under pension legislation, unlike most RRSPs. | Funds are locked in (including any RRSPs transferred to purchase past service), meaning there is limited flexibility with respect to accessing cash. |
| IPP contributions and expenses are fully deductible to the business. If the company borrows money or amortizes the past service cost, the interest charges are also deductible. | Personal RRSP contribution limits are reduced considerably with an IPP. |
| * Setup fees include: preparation of the plan, registration with Canada Revenue Agency (CRA) and the provincial regulator, and initial valuation. This may vary depending on the actuarial firm. | |
In the 2003 federal budget, the Government of Canada increased the maximum pension limits to $2,000 per year of service. As well, this $2,000 limit will be subject to increases based on the industrial average wage beginning in 2006.
At age 50, the annual maximum contribution is more than $6,000 higher than the maximum contribution to an RRSP. As you get closer to retirement, the cost to provide the benefit increases. You can also include service dating back to 1991. This is optional, but if the member decides to include extra years, it will significantly increase the amount that can be deposited into the plan.
