Individual Pension Plans (IPP) can be complex and not for everyone but they can be an excellent fit for certain investors. The ideal IPP client is an entrepreneur, over 37 years old, whose business has matured to the point of generating significant positive cash flows.
Ideal IPP Clients:
- Key person in an incorporated business
- T4 earnings of at least $111,111 in 2007 dollars
- 38 years or older
When starting a business, entrepreneurs often contribute all of their spare cash to their business so funding pensions or RRSPs isn’t a priority. Over time though, priorities can change.
Among the benefits of an IPP is that the allowable contribution limits are generally higher than what’s available through a RRSP for older contributors. Also, through an IPP, you have the ability to make contributions for past employment service dating back to 1991. These benefits allow entrepreneurs to accumulate a pool of capital for retirement relatively quickly.
Key Benefits of an IPP:
- The IPP is protected from creditors.
- Allows up to 60% more contributions than an RRSP.
- Contributions and fees are tax deductible to the business.
- Pension Plan surpluses belong to the member.
Pre-determined retirement benefits.
- No deemed disposition on death.
- IPPs can be used to attract high quality employees.
An IPP should be set up with the assistance of an actuary or benefit consultant. It’s important to meet Canada Revenue Agency regulations and there are actuarial valuations and filings that must be kept up to date.
It’s also important to keep in mind that unlike an RRSP, the investments are locked in. This means that access will be restricted until retirement. Also, it’s not possible to make a contribution to a spousal RRSP plan. However, now that couples can do income splitting in retirement this is much less of an issue.
Overall, while the set up and operating costs are higher than those associated with RRSPs, the benefits to a successful entrepreneur should easily outweigh the costs.