If you're like many, you're probably looking forward to retirement. You'll have more time on your hands to do what you want.
Consider Leo Hill of Lakewood, Colo. Mr. Hill decided to spend time in retirement as an amateur consumer advocate. He became suspicious of toilet paper manufacturers and concluded that there were fewer sheets per roll in a 12-pack than in a four-pack. He counted 60 rolls, sheet by sheet, and concluded that he was being short-changed by one sit-down session per roll in the 12-pack. He took his findings to the media, where a reporter tested his theory, but did not come to the same conclusion, even after testing nine brands.
Now, regardless of how you choose to spend your retirement, I'm sure you'll agree that having more retirement savings (as with toilet paper) will be better than having less. And so I want to discuss individual pension plans (IPPs) today.
The concept
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An IPP is simply a defined benefit pension plan, for one person. Think of an IPP as a replacement for your registered retirement savings plan if you're a business owner, executive or professional.
One of the key benefits of an IPP is that you can set aside considerably more for retirement than what an RRSP will allow. But an IPP is not for everyone. The ideal candidate is 40 years of age or older, and earns at least $116,667 of income that shows up on a T4 slip each year. In addition, the corporation that is going to set up the IPP should be well established and earning consistent profits.
The benefits
The most obvious benefit of an IPP is the ability to accumulate up to 65 per cent more in retirement assets than an RRSP will allow. In addition, the assets of the IPP will be protected from creditors.
Your company can claim a deduction for contributions to the IPP, which is great if the company is profitable enough that you're looking for ways to reduce the company's taxable income. The objective of the IPP is to provide you with defined benefits in retirement, and as you get older, the amount that can be contributed to the IPP generally increases, providing you with greater retirement savings and your company with greater tax deductions.
There are two types of contributions to the IPP: contributions for current service, and for past service. You see, the taxman allows pension plans to capture past service as if you were a member of the plan as far back as Jan. 1, 1991. Past service contributions are in two parts: transfers from your RRSP to the IPP and an additional past service "dump in."
In addition, a potentially significant lump-sum contribution can often be made at the time you retire, to provide for indexing of the pension benefits, improved early retirement or bridging benefits, and more tax savings for your company.
The actuarial calculations for an IPP assume a 7.5-per-cent return on investment inside the plan. If your returns fall short of this, your company will have to contribute more to the plan to meet the defined benefit obligation. This can work to your advantage if you're the owner of the business and are looking for ways to reduce your company's tax burden since your company will make greater deductible contributions to the plan.
The example
Consider William's case. He's 52 years old, has been working since 1991 and qualifies for full past service. I'll also assume he's earned the maximum IPP earnings back to 1991. In this case, William's current service contribution to the IPP will be $26,400 in 2008 (compared to a $20,000 maximum contribution to an RRSP), plus a deductible past-service contribution of $127,100. He'll also transfer $305,400 from his RRSP to the IPP in respect of past service if he has the money in his RRSP. In 2009, the allowable contribution will be $28,400 to the IPP and $30,500 in 2010. Projections show his IPP worth $4,130,000 at age 71, compared to the RRSP, which would be worth $2,660,000, assuming a 7.5-per-cent return in both cases.
The drawbacks
An IPP is a locked-in plan, so there is less flexibility when it comes to withdrawals from, and contributions to, the plan. The cost of setting up an IPP is between $3,000 and $5,000, with annual costs of $700 to $1,000, and a mandatory actuarial valuation every third year, which costs between $1,500 and $2,000.
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