With each passing decade the Canadian population’s life expectancy has steadily increased. While this is great news for society as a whole, the fact that we are living longer also means we have to rethink how we are saving for retirement.
As I’ve noticed, an increasing number of potential clients at Canaccord Genuity Wealth Management are coming to me and asking, “Nick, how can I save extra money for retirement?” In response to this question, I often bring up the subject of Individual Pension Plans, or IPPs, a financial instrument that many individuals and investors have not heard much about.
IPPs, like RRSPs, are registered saving plans. However, IPPs work a bit differently and offer quite a few benefits that may be attractive for eligible people focused on saving more for retirement.
What are Individual Pension Plans (IPPs)?
Individual Pension Plans are set up by an employer. Contributions to an IPP are made by an employer and are meant to fund a pre-determined retirement benefit. For many individuals, the use of an IPP can allow for greater contributions when compared to an RRSP.
Unlike RRSPs, the funds in an IPP account are locked in until retirement from the contributing employers, whereby funds in an RRSP can we withdrawn at any time. Employers must also ensure that there is enough money in the IPP to cover the pension. You do not need to contribute the same amount every year, but there must be enough money in the plan so that the promised benefit is available to the recipient. Therefore when the actuarial review is completed every three years, the company may need to add more money to the plan if it is determined that there will be a shortfall in the pension.
Why are IPPs something to consider?
IPPs are especially attractive to people over 40 because maximum contributions can exceed those of RRSPs. The older you are, the more contributions can be made in an IPP compared to an RRSP. IPP room gets larger the closer you are to retirement.
Employers can also back-fund the IPP going back as far as 1991. This in turn can significantly increase the yearly contribution amount, while at the same time ensuring there are enough funds at the time of retirement. Employers should consider IPPs because contributions are not only tax deductible, they are also exempt from CPP and other payroll taxes.
A safety net
Despite all the above listed benefits, the best thing about an IPP is that it is creditor protected. In the event of a bankruptcy, IPPs are safe. That offers both peace of mind and employment incentive. IPPs can also be used to attract high level employees who would normally feel that they can’t leave their current job because of their pension plan. Expenses associated with the IPP are fully tax deductible to your company, while the benefit to the employee is not taxable.
What’s the catch?
The biggest drawback of IPPs is their rigidity. All assets in an IPP are frozen until the employee retires. At the same time, IPPs are subject to strict regulations and compliance requirements.
IPPs are definitely not for everybody. However, they can offer a helpful alternative to traditional retirement investment tools for key employees particularly for small business and yet another way to diversify retirement portfolios.
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