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What is an Individual Pension Plan?

An IPP is a defined benefit registered pension plan established for the benefit of a single employee. The annual retirement benefits funded by the plan are defined by the terms of the plan and are based on a percentage of the employee’s annual employment income. Unlike a group pension plan, the benefits payable can be designed to suit the needs of the individual beneficiary of the IPP. The IPP can be funded by employer and employee contributions or fully funded by the employer. To qualify as an IPP the employer must fund a minimum of 50 per cent of the required contributions. Defined benefit plans are what teachers and politicians are able to take advantage of. They typically give a predetermined retirement pension based on your career earnings to a CRA maximum. RSP’s on the other hand are defined contribution plans and all that you are sure of is what your contribution levels will be for the next few years.

Advantages of the Individual Pension Plan (IPP)

  • Allows for larger tax deductions – from 50- 70% more in contributions into your retirement account
  • Make up for past service. CRA allows the annuitant to reclaim past contribution room back as far as 1991. This can mean a tax deductible contribution by the company of up to $359,000 at the maximum.
  • Allows a significant tax deductible contribution at retirement typically $200,000 or more
  • Ability to “succession plan” when family members work for the company. When planned properly the IPP can reduce estate taxes on registered funds significantly
  • Allows for additional tax deductible contributions to be made by the company should the rate of return on plan assets be less than 7.5% a year
  • Pension plan surpluses belong to the member.
  • Provides pre-determined retirement benefits
  • 100% creditor proofing of plan assets
  • No deemed disposition of plan assets upon death. Plan assets remain in the plan to provide benefits to surviving members.
  • All expenses are tax deductible to the company
  • Contributions increase with age!

Important Details

  • Assets are locked-in and may, in most circumstances, only be withdrawn during retirement.
  • There is little contribution flexibility – in most cases current service contributions must be made each year.

HOW DOES THE IPP WORK?

How do you calculate your Retirement Pension?

Your retirement pension is calculated using:

  • Your career T4, T4PS, earnings with source deductions or pensionable earnings
  • Assumptions determined by the actuary, which are acceptable to CRA
  • Your age
  • The age at which you retire, the longer you are contributing to the pension the larger the benefit.

Earnings are used to determine the amount you can contribute. You need to earn T4 or equivalent earnings of at least $105,550 in 2006 dollars to qualify for full benefits within an IPP.

IPP Contributions first exceed RRSP Contributions around age 37. Therefore, to fully qualify for maximum IPP benefits, T4 earnings should be larger than $105,550 in 2006 dollars and you should be age 37 years or older. Typically most clients are over 40.

Below are some approximate Past Service and current service contribution limits. Depending on the Actuaries method of calculating Past Service there could be differences in the figures below depending which Actuary is chosen.

Table of Allowable IPP Contributions

2006 Tax Deductibility

Age in 2005 Past Service
from 1.1.1991		 Current Service
35 $17,000 $17,200
40 $41,400 $18,900
45 $68,300 $20,700
50 $97,800 $22,800
55 $130,300 $25,000
60 $165,900 $27,500
65 $211,200 $30,600

Please note: This example includes an RRSP Qualifying transfer of $231,600

Assumptions: Based on Maximum Earnings updated to 2006 of $105,550 per annum

FUNDING THE INDIVIDUAL PENSION PLAN

The actuary will determine contribution levels based on the retirement benefits you are entitled to. Assumptions are made regarding wage growth.The annual contributions must compound at a 7.5% net annual rate of return to ensure your IPP has adequate assets to provide your retirement benefits. Pension law requires a tri-annual evaluation to be completed by an actuary to ensure the plan is acheiving the long term rate of return required.

Any deficits in plan assets normally require further contributions to put the plan back to level. This tax-deductible additional funding can be made over a period of up to 5 years from the date of the last tri-annual evaluation. If a surplus is generated in the plan, the sponsoring corporation may be required to take a contribution holiday.

RETIREMENT OR CLOSING THE PLAN

At retirement you will have a choice of retirement vehicles. The choices are a monthly pension from the plan, an annuity, a Life Income Fund (LIF), or a Life Retirement Income Fund (LRIF). The Voluntary Funding is not recommended if transferring to a LIRA, LIF or LRIF as it may put the plan into a surplus which will require that money to be withdrawn and tax paid.

If you decide to purchase an annuity or draw a pension from the Plan you may make the full Voluntary Funding. The plan will transfer funds to the life insurance company to purchase the annuity. Annuities have various options

If you wish to close the plan you have a couple of options. You can commute the actuarial value of the plan to a LIRA or you can transfer the plan to a holding company where it continues to exist but no contributions have to be made and it can be reactivated again by transferring back to an operating company.