Flexible pension planning with IPPs and Group RRSPs

Keeping both workers and bosses happy

There are flexible alternatives to conventional pension plans for both employers and employees. For employers, offering a Group Registered Retirement Savings Plan (RRSP) as a benefit can be more attractive to potential employees than a registered pension plan. And for business owners, executives, and professionals, an Individual Pension Plan (IPP) can offer enhanced retirement savings over and above an RRSP.

Group RRSP

A Group RRSP has the same structure as an individual RRSP, except that it’s administered by the employer, and individual investment choices are typically limited. But they have the added advantage of letting both employee and employer contribute to the plan. Contributions are tax deductible, and like individual RRSPs, tax on any investment growth inside the plan is deferred until the plan is collapsed.

Employee contributions are made by regular payroll deduction, and contributions result in a tax deduction. If the tax deduction results in a sizable annual refund, it can be applied to reduce your source withholding.

While employer contributions are not mandatory, they are typically made as an additional employee benefit. An employer’s matching contributions to Group RRSPs are often between 2% and 6% of your annual salary. Keep in mind that employer contributions to Group RRSPs are added to your income as a taxable benefit.

Depending on the terms of the Group RRSP, you may have some choice in the type of investments or portfolios to choose for your plan, but generally you won’t be able to trade individual stocks yourself.

If you leave your employer, the proceeds from your Group RRSP can be transferred to your individual RRSP or to a Registered Retirement Income Fund or if you’re at or close to retirement age, to an annuity. If you take the proceeds in cash, it will be considered taxable income in the year you receive it, and taxed at your marginal rate for the year.

Individual Pension Plan

An Individual Pension Plan (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.

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.

An IPP allows you to start pension payments any time 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.

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 do-it-yourself types of product, so employers will need the help of a qualified financial professional to set up and administer the plans, to ensure they 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. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

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.