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An IPP is a defined benefit Pension Plan that is registered with the federal and provincial governments. IPP’s allow the largest retirement benefit under pension legislation. They are typically significantly larger than RRSPs or Group RRSPs. IPP’s have much larger contribution room when compared to an RRSP. IPP assets areprotected and creditor proof.
IPP’s are an ideal retirement solution for business owners, executives, incorporated professionals or employees with over 10 years of history with their employer. Typically those who are 45 and older benefit the most from using an IPP.
IPP’s solidify retirement benefits to the plan holder which is guaranteed by the business. Past service contributions. Based on salary and years of service can provide a significant tax deductible contribution to the IPP. Your company will make the contributions on your behalf, which are a tax deductible expense to your company. Ensure that youmaximize the financial benefit of being a business owner, incorporated professional or executive. Your retirement should be part of your compensation.
IPP’s contain two cost elements, the actuary fee and the investment management fee. Typically this fee is 1.00% to 1.75% of the plan’s assets. This is 10% to 30% less than the cost of a typical mutual fund! Additionally there is a one time set up fee of $3000 + HST and regulatory filing costs of about $250 annually.
John Smith is a 55 year old business owner. After paying off his house and children’s education he wants to contribute more to his retirement. The business is very successful and the extra earnings are piling up. He has an RRSP worth $450,000 and has been taking a salary from his business for the last 10 years. As a result of these past years of service, he will have a $200,000 past service contribution from his business to help fund the IPP. *see assumptions below.
As the above graph shows the first year IPP contributions are $29,500 vs only $22,970 for an RRSP (2011). At age 65 the IPP contribution is a full 93% greater than the traditional RRSP.
This graph shows how much faster the IPP value surpasses the RRSP value by 102.65% by age 71 due to the higher contribution limits. There is a $200,000 increase for the IPP vs the RRSP in the first year due to the past service contribution, which is a tax deductible expense to the business.
*Assumptions: 6% rate of return, 2.91% CPI (inflation), Salary increase of 3% per year, Investment management fees of 2.5% per year, Maximum pensionable earnings each year, full past service from 1991. RRSP rolls into the IPP when the IPP is created, Contribution timings are at the beginning of each year.