An individual pension plan (IPP) is a DB pension plan for one person, typically the owner or an executive of an incorporated company. Typically, the company makes all contributions.
On this page you’ll find
Advantages of IPPs
- Potential for greater tax-sheltered savings: The maximum contribution to an IPP each year can exceed the amount an individual can contribute to an RRSP on their own, especially at later ages (age 50 or older).
- Creditor protection: Like other DB benefits, IPP benefits are fully protected from creditors. RRSP savings may not be.
Disadvantages of IPPs
- Minimal RRSP contribution room: IPPs are designed to maximize tax-sheltered benefits, so the individual’s RRSP contribution room each year is reduced to near zero by a pension adjustment (which equals the value of the IPP benefit earned in the previous year).
- Less flexible retirement income options: Provincial and federal pension laws apply to IPPs – and can restrict flexibility in retirement income planning.
- Cost and complexity: IPPs have higher set up costs and greater complexity than RRSPs, with the need for ongoing administrative tasks such as annual reporting and regular actuarial valuations.
Maximizing IPP benefits
To maximize the benefits of an IPP, the owner or executive typically:
- is in their 40s or 50s when the IPP is set up, to ensure that IPP contributions can exceed the amount the individual could save on their own through an RRSP, and
- has a high annual salary ($100,000 or more), so that the company can maximize its IPP contributions.
Because of the complexities of an IPP, you may want to get professional advice to determine if an IPP is an appropriate strategy for you.
Funding IPPs for past service
A company can fund an IPP to provide a benefit for the owner’s or executive’s previous years of employment with the company. However, the cost of this must first come through a transfer of the individual’s RRSP and DC pension plan savings – plus a reduction in any unused RRSP contribution room – before the company can contribute to fund this benefit.
Key point
IPPs are a complex retirement savings strategy – consider professional advice from a reputable advisor before setting one up.
