– 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.
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
© 2018 by the Fund Library. All rights reserved. Reproduction in whole or
in part by any means without prior written permission is prohibited.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.