Individual pension plans (IPPs)

An individual pension plan (IPP) is simply a defined benefit pension plan for one member. IPPs specifically benefit owners of companies or executives of incorporated companies who do not participate in an employer pension plan and who have annual earnings in excess of $120,000. Ideally, individuals should be 50 years of age to derive the maximum benefits from the plan. However, such plans have been set up by persons as young as 40. The contribution advantage of using an IPP vs. an RRSP increases with age.

These plans can be either 100% funded by the employer or employer/employee-funded. In general, you won’t be able to fund more than 50% of the cost of the pension.

Subject to certain limitations, a defined benefit plan will provide for an annual pension equal to a percentage of your highest earnings over a given period. One of the main benefits of these plans has been the possibility of making significant contributions for past service. They were also promoted on the basis that they could potentially defer the receipt of retirement income for a longer period of time than was generally possible with other types of retirement plans.

However, for service contributions made after March 22, 2011, the cost of the past service must first be satisfied by transfers from RRSP assets (as well as money purchase registered pension plan assets) belonging to the IPP member or a reduction in the member’s unused RRSP contribution room before new past service contributions are permitted.

Also, the rules now provide for minimum withdrawal amounts from an IPP, similar to those that currently apply to RRIFs.

These two changes, which were aimed at making IPPs more comparable to other retirement savings vehicles, have eliminated many of the advantages that IPPs have had over other plans.

IPPs are not for everyone. It’s an individual decision based on several factors—your age, current and projected income level, the rate of return earned on the plan’s assets, whether you’re an owner-manager or an arm’s-length executive and several other considerations. Due to their complex nature, as well as the recent changes to the rules, it’s recommended that you consult your tax or financial adviser if you have any questions as to whether an IPP is a viable retirement savings vehicle for you.