Everything you need to know about the individual pension plan

What is an Individual Pension Plan?

An Individual Pension Plan, or IPP, is a registered retirement plan designed for one person – you. It’s a defined-benefit pension plan, meaning it provides predictable retirement income. Your future pension benefits are based on a formula that considers your age, salary and years of service.  

The plan must be sponsored by an incorporated company, which makes it different from individual retirement savings options such as a Registered Retirement Savings Plan (RRSP). 

Contributions made by the business on your behalf are not taxable to you. As with an RRSP, you only pay taxes when you withdraw money from the plan. Any money the investments earn inside the IPP grows tax-free until you take it out. 

Who is an IPP for? 

An IPP is designed for incorporated business owners, incorporated professionals (such as doctors, dentists and lawyers) and senior executives who earn T4 salary from their corporation.  

IPPs are usually offered to “connected employees,” meaning people who own 10% or more of the shares in the incorporated business that’s sponsoring the plan.  

Strong IPP candidates typically have a stable history of drawing salary (rather than dividends) from their corporation, ideally with service going back many years. The corporation must also have reliable cash flow to meet the plan’s ongoing funding requirements. Members cannot be participants in another defined-benefit pension plan. 

When does an IPP become most beneficial? 

Age plays a major role in determining whether an IPP is worthwhile. Contribution limits increase with age, years of service, and salary. Around age 40, IPP and RRSP limits are similar, but the gap widens quickly afterward. For example, in 2025, a 50-year-old can contribute roughly $42,900 to an IPP compared to $32,490 to an RRSP. By age 60, the advantage grows to approximately $19,000 more per year. 

Salary levels matter too, since IPP benefits are calculated based on T4 employment income. While IPPs offer some value for individuals earning around $75,000 – especially those with a long salary history – they generally become more advantageous once annual income reaches $100,000 or more.  

At higher salary levels, the benefit can be significant. In 2025, for example, a 60-year-old earning $180,500 could contribute $53,320 to an IPP versus the $32,490 RRSP maximum: a 64% increase that compounds over time. 

How does an IPP work? 

An IPP is a registered defined-benefit pension plan set up as a trust. All contributions are made by the corporation. These contributions are tax-deductible to the business and do not count as taxable income for you. Instead, a pension adjustment appears on your T4 slip, which reduces the RRSP room you can build going forward. 

Every three years, the plan undergoes an actuarial valuation to ensure it has enough assets to meet its obligations. If investment returns fall short, the corporation must make additional contributions. If returns exceed expectations and create surplus beyond 25% of plan liabilities, the corporation can pause contributions. This cycle of contributions, investment growth and periodic adjustments continues until retirement, ensuring the plan stays properly funded to deliver your guaranteed pension income. 

What’s the difference between an IPP and an RRSP? 

An RRSP functions like a defined-contribution arrangement where you decide how much to contribute – up to 18% of your income or the annual maximum – but the final retirement amount depends on investment performance.  

With an IPP, the corporation contributes whatever amount an actuary calculates is necessary to fund your predetermined retirement benefit. This fundamental difference means that if investment returns fall short, the company must top up the plan, providing you with guaranteed retirement income security.  

When to choose one over the other:  

• An RRSP is a great option if you’re younger, earn less than $75,000, want flexibility to access your savings or prefer low costs and full control over when and how you invest. RRSPs are simple, require no mandatory contributions and allow withdrawals through programs such as the Home Buyers’ Plan. 
• An IPP is a better fit if you’re over 40, earn $100,000 or more in T4 income from your incorporated business and want higher contribution limits and predictable retirement income. IPPs work best when your corporation has stable cash flow and when you have many years of past salary that can be credited toward your pension. 

How much can you expect to receive from your IPP? 

Your pension benefits, or annuity (the amount you receive each year), depend on several factors, including your salary and the number of years you participated in the plan. An actuary calculates your future annuity and determines how much must be contributed to fund it. 

By law, the formula provides an annual pension equal to 2% of the average of your three highest-earning years, up to the maximum amounts allowed under federal pension rules. These limits are set by the government and are adjusted yearly. In 2025, the maximum monthly pension was $3,757. This amount is indexed each year. 

You may also be able to buy back past years of service, allowing the corporation to make additional contributions that increase your future pension benefits. 

Example 1: A standard IPP

Cathy sets up an IPP when she’s 45 with no past-service buyback. If she retires at 65 after 20 years in the plan, the pension would equal 40% of her eligible salary. Based on an average of $175,000 over her three highest-earning years, that means her annuity is $70,000. 

20 years x 2% = 40%, and 40% x $175,000 = $70,000 

Example 2: Past-service buyback

Daniel, a 50-year-old business owner, opens an IPP and buys back 15 years of past service. When he retires at 65, he’s credited with a total of 30 years. With an average salary of $160,000, the annual pension would be $96,000. The buyback requires a non-taxable transfer from existing RRSP savings, with the corporation contributing the rest as a tax-deductible lump sum. 

30 years x 2% = 60%, and 60% x $160,000 = $96,000 

How are IPP investments managed? 

Much like RRSPs, IPPs can hold a wide range of investments, including mutual funds, stocks, bonds, and other market-based products. Some plans may allow specialized investments, such as private company shares or real estate, depending on the jurisdiction and approval requirements. 

The investments are managed with a pension-style approach that balances growth with stability. Early on, portfolios often focus on long-term growth. As you approach retirement, they usually shift toward more conservative options to help protect accumulated savings. 

One built-in advantage is risk management. If the plan’s investments don’t meet the return assumptions used by the actuary, the corporation – not the plan member – must make additional contributions. Stronger-than-expected returns can reduce future funding needs or create room for benefit enhancements. 

You can choose a self-directed approach, selecting from the allowed investments, or opt for professional investment management. Most financial institutions offer ready-made portfolios tailored specifically for IPPs. 

How do you set up an IPP?  

Setting up an IPP usually starts with a conversation with your financial advisor, who helps determine if an IPP fits your income level, retirement goals and corporate structure. If it makes sense for your situation, an actuary prepares a proposal based on your age, salary history and years of service. 

Once you choose to proceed, the actuary submits an application to the Canada Revenue Agency. If the plan is approved, a trust account is created. The corporation then makes the initial contribution, which often includes a significant past-service amount for years dating back to 1991. 

Documents you’ll need: 

• Corporate financial statements 
• Full T4 history, ideally back to 1991 
• Articles of incorporation and shareholder agreements  
• Records of existing RRSP balances (for past-service transfers) 
• Proof of historical employment and compensation if buying back past service 

From the first consultation to the initial contribution, the setup generally takes 8 to 12 weeks. Costs typically include a one-time setup fee of roughly $3,000 plus HST for actuarial work and registration, followed by ongoing annual filing costs (approximately $250) and actuarial valuations every three years, usually priced at 1% to 1.75% of plan assets. 

What are the advantages of an IPP? 

An IPP offers several potential benefits for participating employees. The main ones include:  

• Predictable retirement income: You know how your pension will be calculated in advance. 
• Higher contribution limits: In many cases, the maximum contributions allowed are higher than what you can put into an RRSP. 
• Tax-sheltered growth: Investment returns inside the plan grow tax-deferred. 
• Flexible income splitting: Pension income from an IPP can be split with your spouse at any age. With a registered retirement income fund (RRIF), you must wait until age 65. Earlier income splitting can result in significant tax savings, particularly if one spouse is in a higher tax bracket than the other. 
• Past service buyback: You may be able to buy back years of past service when the plan is set up, increasing your future pension. 
• Terminal funding at retirement: When you retire, the corporation can make an additional tax-deductible lump-sum contribution to top up the IPP. This funding can cover enhancements like cost-of-living adjustments, bridge benefits or shortfalls. 
• Support for early retirement: If you retire earlier than planned, the business may make an additional contribution to help fund your pension. This is a specific application of terminal funding. 
• Surplus transfer possibilities: If the return is more than expected, the IPP is allowed to accumulate a surplus of funds. The surplus can be used to enhance retirement benefits, reduce future corporate contributions or be transferred tax-free up to the maximum transfer value into a LIRA or Life Income Fund (LIF). 
• Creditor protection: In many provinces, IPP assets receive strong protection under pension legislation, as they’re considered locked-in pension benefits. This provides significantly stronger protection than RRSPs, which can be vulnerable to seizure in certain cases. 

Advantages for the company: 

• Plan contributions are tax-deductible: Amounts the company contributes to the IPP can be deducted from its taxable income. 
• Setup and administration costs are tax-deductible: Fees related to creating and managing the plan can also be claimed as business expenses. 
• Reduced shareholders’ equity: Funding an IPP lowers the company’s retained earnings, which can help make it easier to sell the business in the future. 
• Loan costs are deductible: If a loan is required to fund the IPP, the interest on that loan is generally tax-deductible. 
• Business sale facilitation: When selling a business, establishing an IPP and using terminal funding can create significant tax deductions against the taxable proceeds from the sale, reducing your overall tax liability. 

What are the disadvantages of an IPP? 

An IPP also comes with a few limitations for both the member and the company: 

• Higher setup and administration costs: An IPP is more complex and expensive to establish and maintain than an RRSP. 
• Reduced RRSP contribution room: Most of the member’s RRSP contribution room disappears as annual IPP contributions trigger a pension adjustment, which reduces how much you can save in an RRSP. You also cannot contribute to a spouse’s RRSP.  
• Salary requirements: The company must pay the member a salary rather than dividends, as the annuity is based on salary. 
• Potential additional contributions: If investment returns fall short, the company may need to make extra contributions to keep the plan properly funded. 

An Individual Pension Plan can be a strong option for retirement savings for business owners and executives. In other situations, a group retirement plan may be the better course of action. In those cases, options include group RRSPs, pension funds and Voluntary Retirement Savings Plans (VRSPs).  

A financial advisor can help you figure out which approach best supports your long-term goals. Reach out to one today.