What is an Individual Pension Plan?
Most people are familiar with RRSPs, which are defined contribution plans. Contribution limits to RRSPs are set by Ottawa (currently 18% of prior year’s earnings to a maximum of $19,000 for 2007). However, what is not determined is the annual income you may receive from an RRSP on retirement.
An IPP is a defined benefit pension plan. It sets your monthly income at retirement. Covered earnings for pension plan purposes are up to $111,111, in 2007 dollars. An IPP permits the accumulation of greater assets, up to 60% more than an RRSP.
The IPP is similar to an RRSP in that it uses an investment account that accumulates over time to provide retirement benefits. Unlike the RRSP, the IPP provides certain guarantees. The amounts are locked in and may generally be used only for retirement purposes. Plan contributions are determined by a series of Actuarial Valuation Reports in order to provide sufficient assets at retirement.
Key Benefits of the Individual Pension Plan (IPP)
- Allows for larger tax deductions – up to 60% more in contributions into your retirement account
- If you have maximized your RRSP contributions, the IPP is an excellent way to increase retirement assets and have your company make large tax deductible contributions
- Allows a significant tax deductible contribution at retirement
- Safer investment rules and limitations compared to RRSPs
- 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
- Ability to “succession plan” when family members work in the business
- 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 costs associated with the pension plan are tax deductible to the company.
What you need to know
- Assets are locked-in and may, in most circumstances, only be withdrawn during retirement.
- There is little contribution flexibility – in most circumstances the plan must be funded each year.
Reprinted with permission from Gordon B. Lang
President & Chief Executive Officer
Gordon B. Lang & Associates Inc.
http://www.gblinc.ca/