Individual pension plans can generate healthy tax savings and peace of mind throughout retirement

Are you over 40 and earning a six figure income? Why not consider looking beyond a Registered Retirement Savings Plan (RRSP) to build your nest egg. For the right person, Individual Pension Plans (IPPs) can generate significant tax advantages beyond those provided by an RRSP. Additionally, an IPP can also produce higher pension benefits. An IPP is a defined benefit pension plan– if you are a business owner or senior executive, an IPP offers both maximum tax relief and a maximum retirement pension. The result? You won’t have to rely solely on your RRSP’s performance to provide a long and happy retirement. That’s because IPPs also offer guaranteed lifetime income. Any surplus in the plan belongs to you. This is an advantage IPPs have over other pension plans where any surplus stays in the fund and is used by the company to pay for benefits for other members of the plan.

Do you qualify for an IPP?

“If you are in your 50s, running your own incorporated business and earning a six-figure income,” says Louise Guthrie, Assistant Vice- President, Manulife Investments Tax and Regulatory services, “you’re in a financial position to seek a more aggressive tax deferral arrangement than exists with your RRSP. If you run the business with your spouse, you could be ideal candidates for a two person IPP.” To qualify for an IPP, you must:

• Have employment income reported on a T4
• Be an employee of an incorporated company; and
• Be age 40 or older and earn an income of at least $75,000 from the company sponsoring the IPP.

What are the advantages of an IPP?

• Employees over age 50 enjoy an annual maximum contribution that is at least $6,000 higher than the maximum contribution for an RRSP
• Pension benefits are protected from creditors under pension legislation, unlike most RRSPs
• Guaranteed lifetime income – the IPP offers a predictable retirement income. An actuary determines the current annual funding requirements of the future retirement income
• As you age, contributions to the plan increase. The amount depends on your salary, age, and years of service with the company. If past service is being provided and you have contributed to an RRSP after- 1990, you must transfer your RRSP funds to the IPP. The company then pays the balance of the cost to provide for past service from 1991.
• IPP contributions and expenses are fully tax deductible to the business. If you borrow money or amortize the past service cost, you can deduct the interest charges.

THE IPP ADVANTAGE
Contribution Comparison – Age 55 to 65

Year	IPP	RRSP	Past Service
2005	25,000	16,500	138,900
2006	26,837	18,000	(company)
2007	28,850	18,990
2008	31,014	20,034
2009	33,340	21,136
2010	35,841	22,299
2011	38,529	23,525
2012	41,419	24,819
2013	44,525	26,184
2014	47,864	27,624

The chart above demonstrates how the IPP contribution exceeds the indexed RRSP limit each year. It also shows the additional amount of past service the company pays the first year, in addition to the transfer of $198,200 from your RRSP.

IPPs have drawbacks

While ideal savings vehicles for many, IPPs are not for everyone. It’s important to remember IPPs are defined benefit pension plans and not RRSPs with higher limits. At retirement or if you leave the company or decide to wind up the plan – any surplus that is not required to pay for the promised benefits is paid to you in a lump sum and is fully taxable. You must also pay for actuarial and administrative services as well as provincial filing fees that don’t apply to an RRSP.

Most actuarial firms will charge the same to administer an IPP as any other type of defined benefit plan. In addition to the actuarial and administration fees – other fees could include annual provincial filing fees and trustee fees, where applicable. Your advisor will guide you to an actuarial firm that best reflects your needs. “Before making any decisions, speak with your financial advisor and be sure you understand all the benefits and drawbacks to IPPs,” says Louise Guthrie. “To make the most of your IPP, you’ve also got to have a longterm financial plan in place as well as a firm handle on your income flow.”

The information contained in this article was provided by Manulife Investments for information purposes only. It is not intended to provide specific legal, accounting or tax advice and should not be construed as such. Individuals should consult with their professional advisors to ensure that any information provided is applicable and appropriate to their specific situation.