Everything you Need to Know About the Individual Pension Plan

What is an Individual Pension Plan?

The IPP is a registered retirement plan intended for one person. It is a defined benefit plan, which means that you know in advance the amount you will receive upon retirement. The plan is sponsored by an incorporated business for its owners or executives.

You will not have to pay taxes on the contributions made for you by the business. Just like with the Registered Retirement Savings Plan (RRSP), you will only pay taxes on the amounts you withdraw. Investment earnings are also tax-sheltered as long as they remain in the plan.

Who is it for?

Normally, the Individual Pension Plan is reserved for connected employees, meaning employees who hold 10% or more of the shares in the business sponsoring the plan.

If you are 40 or older and earn more than $75,000 a year, this tool is often more beneficial than the RRSP. The contributions can be much higher than the RRSP’s allowable limit. You can therefore save more money for your retirement.

What will be the amount of your annuity?

The amount of annuity you will receive depends on different factors, most notably the number of years you worked and your salary. An actuary will make the necessary calculations to determine the annuity and set the contribution amount.

The law provides an annuity equal to 2% of the average of your three highest years of salary. There are, however, maximum amounts. For example, in 2019, the maximum monthly pension is $3,025. This amount is indexed each year.

Upon retirement, you can receive a benefit paid out directly from the plan if it is still valid. You could also choose to purchase a life annuity, or even transfer the sums into an RRSP or a Registered Retirement Income Fund (RRIF).

What are the advantages?

The Individual Pension Plan has several advantages for participating employees. Here are the main ones.

• Predictable retirement income.
• Generally higher maximum contribution limits than the RRSP (under certain conditions).
• The benefits allow income splitting between spouses at any time. With the RRIF, you must wait until you are 65 years old.
• The participant can buy back prior years of service upon the plan’s implementation. You could therefore receive a higher annuity.
• Returns are tax-sheltered.
• In case of early retirement, the business can supplement the plan with an additional contribution.
• The amounts accumulated in an IPP cannot be seized. In certain cases, funds in an RRSP may be seized.
• Assets are not locked in for a connected person.

Companies also benefit from certain advantages:

• Company contributions are deductible from its income.
• Setup and administration costs are tax-deductible.
• The IPP reduces shareholders’ equity, which can help facilitate the sale of the business.
• The costs of a loan that is needed to fund the IPP are tax-deductible.

What are the disadvantages?

Of course, the Individual Pension Plan also has a few disadvantages for both the participant and the company.

• Setup and administration costs for an IPP are significant.
• The participant will have almost no new contribution room in their RRSP. They will also not be able to contribute to their spouse’s RRSP.
• The company must pay a salary rather than dividends, as annuity is based on salary.
• Additional contributions may be necessary if returns are insufficient.

The Individual Pension Plan is an advantageous retirement option for business owners and executives. For other situations however, a Group Retirement Plan may be better suited to certain needs. Consider Group RRSPs, pension funds and Voluntary Retirement Savings Plans (VRSPs), for example. A financial advisor can help you understand the different options at your disposal to make your retirement really count.