Business owners can save more in a Personal Pension Plan

Businessman with a chain ballIPP Funding can become a ball and chain on the company

 

Incorporated business owners and professionals over age 40 can save more for retirement in an individual pension plan (IPP) than in a registered retirement savings plan (RRSP). But a Personal Pension Plan (PPP) offered by INTEGRIS Pension Management Corp. offers a unique, more flexible savings vehicle that will provide a bigger retirement nest egg and can benefit people as young as age 18.

What’s an IPP?

An IPP is a defined benefit (DB) pension plan typically set up for one person with contributions made by the corporation. The individual must be incorporated and receiving T4 income.

Contributions must be made each year by the company and are based on an actuarial calculation of how much money will be required to pay the maximum benefit permitted by the Canada Revenue Agency (CRA) based on a prescribed rate of return on assets of 7.5%. Therefore, the older you get, the more you get to put into your pension plan which allows for greater tax-deferred compounding.

The advantages of an IPP are:

  •  Ability to contribute more each year than in RRSPs.
  • All fees are a direct tax-deductible expense for the company.
  • A plan member has the ability to buy back previous years of service
  • If the plan does not earn 7.5% as assumed in the actuarial calculations, the corporation will be able to contribute additional tax-deductible funds to the plan.
  • Funds are creditor protected.
  • When the plan member retires or the plan is wound up, CRA permits additional terminal funding to buy ancillary benefits like indexing or bridge benefits.

 

However, in spite of the many advantages to setting up an IPP, there are reasons why IPPs have not gone mainstream. They are very complex and are not flexible enough to adapt to the fluctuating revenue of the business. As a result, there may be years when the escalating payments required to fund the IPP are not affordable for the company.

Enter the PPP

 The INTEGRIS PPP has all of the advantageous of an IPP with much more flexibility.

There are three separate accounts: a Defined Benefit (DB) account, a Defined Contribution (DC) account and an account for Additional Voluntary Contributions (AVCs). Before January 1 of each year, the member can elect to participate in the DB or the DC account.

For example, if it is apparent that the company will not be able to meet the DB funding requirements in the next year, the member can opt to participate in the DC plan and for that year the plan sponsor will only be required to make a minimum contribution of 1% of earned income.

“A lot of independent business people have fluctuating cash flows and an IPP can become a ball and chain,” says Jean-Pierre Laporte, Chief Executive Officer of INTEGRIS.

When the company becomes more affluent, it can buy back the service under the DB provisions of the plan up to the funding limits. If the member has an RRSP, the assets can be rolled into the Additional Voluntary Contributions account and used to purchase the past service.

“Another advantage of rolling RRSP funds into an AVC in the PPP is that investment management expenses that are not deductible inside of the RRSP are now deductible because the corporation is responsible for paying plan expenses,” he says.

Also, people under the age of 40 can save in the PPP’s DC account, so contributions are always higher (see Table 1 below) than in an RRSP due to the one year lag. The money is also in the plan for longer so investment earnings can compound over a more extended period.

In 2014, the maximum RRSP contribution is $24,270 while the maximum DC plan contribution is $24,930. The $660 difference occurs because RRSP contributions are based on the previous year’s earned income while DC contributions are based on current year earnings.

How much more can be saved than in an RRSP?*

AgeDB max (IPP or Integris PPP)DC max (Integris PPP only)RRSP Max DB Advantage over RRSP
18-39$24,930$24,930$24,270.00$660
40$25,196.79$24,930$24,270.00$926.79
45$27,677.40$24,930$24,270.00$3,407.40
50$30,402.22$24,930$24,270.00$6,132.22
55$33,395.30$24,930$24,270.00 $9,125.30
60$36,683,05 $24,930$24,270.00$12,413.04
64$39,544.79 $24,930$24,270.00$15,274.79

 

*This table shows permissible contributions by age in an IPP or a PPP (where salary is $140,000 or more) as compared to RRSP contributions. Figures are based on tax laws and actuarial standards in effect as of January 1, 2014 and are for illustrative purposes only. Individuals should consult their financial advisors regarding their own situation.

INTEGRIS offers its PPP on a trust or insurance company platform. Basic retail pricing on a trust platform is $2,500 + HST for the first year and $1,800 + HST in subsequent years. The yearly fees include the cost of set up, on-going administration, actuarial services (including triennial valuations) and access to a pension officer.

Investment costs (MERs) are in addition to the annual charges from INTEGRIS and based on the fee schedule established by the investment manager selected by the corporation sponsoring the plan. All investment and administrative fees are tax deductible to the corporation.

Plan members also benefit from a simple end to-end turn-key solution. INTEGRIS offers a streamlined process, which benefits the client by providing economies of scale instead of each person paying separate bills for professionals such as actuaries, trustees or custodians, lawyers and pension consultant.

“All of the plan administration is delegated to INTEGRIS,” says Laporte. “PPPs are registered pension plans fully administered by a fiduciary pension management to ensure strict compliance with all pension and tax laws that regulate pension arrangements.”

 Also read:

10 Reasons Why Business Owners Age 40+ Need an IPP

Transferring from a DB IPP to an RRSP Triggers Tax Inclusion: The Queen and Yudelson, 2010 FCA 44

 

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