An Individual Pension Plan (IPP) is a defined benefit pension plan that is designed and managed for the exclusive benefit of a single individual or a small number of people, as opposed to a larger group of workers. IPPs are governed by the Canada Revenue Agency (CRA) and are subject to the same laws and regulations as other registered pension plans.
IPPs may offer a greater amount of retirement income than other forms of retirement savings plans, making them an attractive alternative for some highly paid people, such as business owners and company executives. However, IPPs are often more complicated and expensive to establish and manage than other kinds of plans.
What are the benefits of an IPP?
An Individual Pension Plan (IPP) can provide several benefits to the individual or small group of individuals for whom it is established.
Higher level of retirement income:
An IPP is a defined benefit pension plan, which implies that the person is guaranteed a particular amount of income in retirement based on a formula that considers characteristics such as salary, age, and length of service. This may be more advantageous than other retirement savings plans, such as defined contribution plans, which give retirement income depending on the account balance.
Greater flexibility in funding:
IPPs are normally sponsored by the employer, thus the individual or small group of persons are not responsible for making payments. This might be advantageous for highly paid persons who lack the disposable income to make substantial contributions to a retirement savings plan.
Employer contributions to an IPP are tax-deductible, and investment income received inside the IPP is taxed at a reduced rate.
Moreover, unlike RRSPs, IPP assets have creditor protection under provincial law, unlike RRSPs. In contrast, unless you have filed for bankruptcy in Ontario, RRSPs are not protected from creditors. Even so, payments made to an RRSP in the 12 months previous to filing for bankruptcy are not protected.
Possible estate planning opportunities:
IPPs can be used for estate planning for small business owners, thus the pension plan can be passed on to the beneficiaries. If your spouse or children are working and generating T4 income via your firm, they are entitled to join the IPP. Thus, the IPP assets may be transferred to the next generation without incurring tax or probate costs. Conversely, a rolled-over RRSP may only be transferred tax-deferred to a spouse or disabled child. The majority of Canadians are unaware that their RRSP will be completely taxed upon the passing of their second spouse.
Financial Advisor, Manulife Securities Incorporated
Life Insurance Advisor, Manulife Securities Insurance Inc.
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