Don Maycock...advising you to and through retirement!

Build Your Retirement Savings Faster with an Individual Pension Plan (IPP)

Build Your Retirement Savings Faster with an Individual Pension Plan (IPP)

The contributions to an IPP are graduated by age, and as such as the individual grows older, their contributions increases by a rate of 7.5% per year unlike the RRSPs fixed maximum of $14,500. For example an individual who is earning $100,000 per year at age 55 can contribute $22,400 for that year as opposed to the $14,500 limit imposed under RRSP rules.

An IPP is a form of defined-benefit pension plan and as such guarantees a set level of retirement income – something that RRSPs cannot do. If the IPP pension fund is not performing up to expectations, additional tax-deductible contributions may be made to top up the fund. In fact, these additional contributions are required by pension funding legislation. In contrast, if RRSP funds do not perform up to expectations, there is no opportunity to top up those savings with additional tax-deductible contributions.

Under certain conditions, the IPP allows for contributions for years of service prior to the plan being set-up. This opens up the possibility of additional deposits into the plan.

Since it is a registered pension plan, an IPP is entirely creditor-proof, except for marital breakdown. This feature is particularly attractive to entrepreneurs, since there is no risk of losing the funds as a result of business failure. In contrast, RRSP savings, except for those associated with insurance contracts, are usually vulnerable to claims by creditors.

An RRSP has no rules on diversification while the IPP mandates a safety first approach by ensuring that the portfolio is not allowed to invest more than 10% of its assets in any one investment. The 30% foreign content restriction however applies in both instances.

At retirement, in a typical company pension plan scenario the former employee is paid a pension for their lifetime and either in full or in a reduced amount to the spouse after their death, for the duration of their lifetime. If both spouses die early into their retirement, the obligation of the company pension is finished – any unused assets remain the property of the pension fund. However, with an IPP the assets in the plan belong to the plan member, and upon their death and the death of their spouse, any remaining benefits will be paid to their estate, to be distributed according to their wills.

IPPs make sense to me, what do you think?

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