IPPs must follow pension rules
If you are a business owner or executive, or an incorporated professional (physician, dentist, lawyer, accountant, and so on), and you’re looking to enhance your retirement savings, you might think about setting up an Individual Pension Plan (IPP).
How an IPP works
An IPP is basically a defined benefit registered pension plan for a single employee rather than a group. 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. An IPP must be set up and funded by a corporation. They are regulated by the government and must follow precisely specified rules, like any other pension plan.
But the real benefit of an IPP is that the allowable contribution limit is typically much higher than for an RRSP. This allows high bracket earners with at least $120,000 a year of taxable income, who are 15 to 20 years from retirement, to accumulate a much larger nest egg than they would be able to through an RRSP.
An IPP is an investment account that can hold the same investments as an RRSP, but IPPs are subject to stricter investment standards and are mostly professionally managed. Like a registered pension plan, the IPP offers certain guarantees, and whatever monies you contribute are locked in until you retire. IPP contributions are determined by actuarial calculations to provide sufficient income at retirement.
An IPP must be funded at least 50% by the employer to qualify. But the IPP beneficiary 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.
IPP payout options
With an IPP, you can choose to start pension payments anytime after you reach the age of 50. However, like an RRSP, you may continue to contribute to an IPP until the end of the year you turn 69. After that, you must convert to a maturity option (or combination of maturity options) that will continue to provide pension income.
Maturity options include a life annuity, which will pay out a guaranteed minimum for as long as you live. It can be structured to continue paying two thirds of your pension to your surviving spouse, or a minimum guaranteed payment to your estate if you both die within a certain period.
Another IPP maturity option is to transfer the assets of the plan to a locked-in account, such as a Locked-in Retirement Account (LIRA), a Life Income Fund (LIF), or a Locked-in Retirement Income Fund (LRIF). A LIRA is typically used if you’re not ready to start withdrawing funds from an IPP. For LIF and LRIF plans, maximum and minimum payments are set by the federal and provincial governments.
IPPs not for do-it-yourselfers
Because IPPs are classified as Registered Pension Plans, they are subject to fairly complex and rigorous rules governing set-up, maintenance, funding, and payout. Beyond the actual investments in the plan, this involves things like actuarial estimates, financial statements and disclosure, costs, asset values, and liabilities. These are definitely not a do-it-yourself type of product, so you’ll 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.
© 2018 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.