INDIVIDUAL PENSION PLANS – AN UNDER UTILIZED PLANNING TOOL
It has been a number of years since we last visited the topic of Individual Pension Plans (IPP). With all the legislative changes recently targeting the taxation of High Net Worth (HNW) families, the IPP has remained steadfast as a retirement savings strategy that can offer significant value.
Most popularized approximately a decade ago, when doctors and dentists were permitted to incorporate their practices, IPP’s provided these typically high income earners the opportunity to shelter a significant portion of their wealth in a very tax effective manner within a Defined Benefit Pension Plan. Since then, mostly due to a lack of hype around the strategy, the number of HNW families utilizing the strategy has declined. The same cannot be said for RSP’s and Tax Free Savings Accounts. Quite simply this can mostly be attributed to a lack of awareness in regard to the IPP strategy by families and their professional team.
We have found that most HNW families have utilized, and are operating an incorporated company in some capacity, which opens the door for the implementation of the IPP strategy. In simple terms the IPP is a private pension plan for you and/or your family, which allows you to shelter investments from taxation typically for amounts well in excess of your RRSP contribution limits.Furthermore, IPP’s provide four additional distinct advantages.
1. Tax Credits to the Corporation One of the most common challenges HNW families with an incorporated entity face is transitioning a significant amount of wealth out of the corporation in a tax effective manner. IPP’s offer a unique opportunity in this situation - not only are you able to move funds out of the company to the IPP tax free, but the corporation is also entitled to tax credits since IPP contributions, administration and management fees are all tax deductible as expenses for the corporation. Furthermore, taxation is deferred on IPP investments until such time funds are withdrawn from the IPP, similar to RSP’s or RIF’s.
2. Creditor Protection The IPP utilizes a trust arrangement and as such can provide creditor protection from personal and corporate creditors. IPP’s have provided better protection from potential business risks. For instance, an IPP is not a personal asset of an employee in the same way as an RRSP. As a result the IPP strategy can provide some additional comfort to those looking for those looking to protect family wealth.
3. Additional Tax Deferral Think of an IPP as a “supersized” RSP. Over time, contribution limits of IPP’s tend to far exceed those of RRSP’s, especially when taking into account “past service contributions”. In many cases, when transitioning from an RSP to an IPP, the older the IPP member, the higher the contribution amount, assuming comparable income levels. Also, under current rules, the IPP’s value may be considered “pension surplus” which is not subject to any withdrawal requirements. In this case, an individual with an IPP is able to defer more of their retirement savings for a longer period of time than is generally possible for an RRSP investor.
4. Estate Transition Efficiencies The IPP is an excellent tool in succession planning for the business owner. You may be able to continue the tax deferral on registered assets beyond the death of the second spouse by making children members of the plan. In addition, since the IPP is a trust structure, it typically flows outside the estate when set up properly.
Wealth Management strategies focus not only on creation of wealth, but also preservation and transition. Individual Pension Plans create a unique opportunity to address each of those areas. If you would like to discuss how strategies such as an IPP could benefit your family, please contact our office.