An Individual Pension Plan is a employer sponsored defined benefit pension plan whose goal is to provide a retirement benefit for “connected individuals” or “significant shareholders” who hold at least 10% or more of ownership interest in a particular company or corporation. This usually includes executives or incorporated business owners who run their own practice such as dentists, doctors, lawyers, etc. earning at least $145,000+ in annual salary. (2.5x the YMPE) An IPP is able to provide a enhanced benefit above of what a traditional savings plan such an RRSP can due to it’s higher contribution limits.
IPP vs RRSP
An Individual Pension Plan (IPP) has similar features to an RRSPs as they both provide tax deferred growth and creditor protection but they different in how much you could contribute. An IPP provides greater accumulation and has a higher contribution limit than an RRSP. Contributions into an IPP increase by age and the closer you are to age 65, the higher the contribution room.
Opening an Individual Pension Plan
IPPs are usually targeted to incorporated business owners, or corporations with key executives who are seeking an enhanced retirement income than what an RRSP can provide. These individuals would be 40 years or older, earning eligible T4 employment income of at least 2.5 times the YMPE ($146,750). The YMPE for 2020 is $58,700. Individual Pension Plans would then be opened with your plan provider and be registered with the CRA who determines the maximum limit that account holders can withdraw in retirement on a given year.
Benefits of Individual Pension Plan
- Tax Deduction
- Employer contributions are tax deductible
- Credit Protection
- Since it’s a registered pension plan, it’s creditor proof and assets exempt from seizure
- Tax Deferral Opportunities
- Employee can benefit from tax deferred growth
- Asset Ownership
- Assets belong to the employee even though contributions were done by the employer. Upon death, the assets are paid to the spouse or estate.
- Guaranteed Benefits
- Company has to guarantee the required level of retirement benefits, regardless of market direction
- Purchase of Past Service
- Recognize years of service, post 1991, through lump sum contributions
Contributing into an IPP
Contributions into an Individual Pension Plan are done by the employee who receives a tax deduction. The employee is not required to contribute. The contributions are done with the assumption that the employee will retire at age 65 and will receive the retirement benefit at that age. To determine the benefit, the employer must use a career average earnings formula and not the final earnings method.
IPP – Required Rate of Return
The rate of return that the contributions must earn is 7.5%. If the return is less than 7.5%, then your employer can contribute additional funds which are tax-deductible. As well, CRA allows the purchase of past service, post 1991, where additional lump sum contributions could be deposited into the IPP.
Withdrawing from an IPP
When contributed, Individual Pension Plan funds are locked in and may only be used to receive a retirement benefit. Funds cannot be withdrawn as easily as withdrawing from an RRSP. However, you do have the option to start the retirement benefit at age 50 but you may hold off doing so until age 72 at which at that time, you must begin withdrawing an annual minimum, similar to a Registered Retirement Income Fund.
Options At Retirement
When you retire, your options are to
- Receive the retirement benefit as stated in the plan
- Use the funds to purchase an annuity
- Transfer the funds into a Locked In Retirement Income Fund (LRIF)
- Transfer the funds into a Life Income Fund (LIF)
Death of Plan Holder
Upon the death of the account holder, the pension will continue to be paid out to the spouse. If there is no surviving spouse, the IPP will be liquidated and distributed to the estate, subject to tax. When the plan holder dies while the IPP funds were transferred in a LIF or a RLIF, the spouse may roll over the funds into their own registered plan. If there is no spouse, the funds may be unlocked depending on provincial or federal legislation.