Welcome to the ‘IPPs Explained’ section of the TWP website.
IPPs, or Individual Pension Plans, are found within a sub-directory of the Business Owners section of the TWP website as IPPs are for incorporated business owners who are paying themselves a salary.
Essentially an IPP is a super-sized RRSP for Business Owners with 2 incredible benefits:
- you can contribute significantly more to the IPP than the RRSP, and
- the business pays for everything (contributions, IPP fees, investment fees, etc …).
Please find below approximately 25 short IPP videos. The design of this page is such that you can use the scroll bar, perhaps on a mobile device, to find a topic you are interesting in and then quickly read the associated text, before or after watching the short video. And you are welcome just to watch the first IPP video (or two), you don’t need to watch all 25 IPP videos.
Popular IPP videos include:
- Triennial Valuations Explained
- 3 Frequent and Common IPP Questions
- Buying Back Past Service Details
- IPP Illustrations: 5 Numbers that matter
Also feel free to use the Search capability, the magnifying glass, on the TWP website, as it will find any IPP keywords you are seeking on this page as well.
Note: There are about 7,500 IPPs in place across Canada today. There were about 15,000 IPPs in place at the peak about 10 years ago. IPPs are relatively unknown because there is no additional compensation system in place to popularize these Retirement Income vehicles. Not to worry, recent proposed tax changes by the CRA are increasing the awareness for legitimate business deductions versus retaining cash within the corporation.
Humour: Pull down with the Scroll Bar and observe my hand positions in each IPP video’s Thumbnail 🙂
What is an IPP?
An IPP, an Individual Pension Plan, is a Defined Benefit (DB) Registered Pension Plan. The IPP is for Incorporated Business Owners that pay themselves via Salary. The 2 main benefits are:
- a larger ‘Nest Egg’, that
- your company paid for (including all associated Fees).
Who can have an IPP?
IPPs are mainly available for ‘Connected’ persons; business owners who own at least 10% of the shares of the IPP sponsoring company. And are paying themselves Pensionable Earnings; this is Salary, evidenced by a T4 (and other slips). Dividends do not qualify as Pensionable Earnings. Also, non-Connected persons may receive an IPP and it is best that your IPP service provider share these exceptions with you.
New Categories of Business Owners with IPPs
IPPs often associated with Doctors, Dentists, Lawyers, Accountants, etc … but Franchise Owners, Internet Moguls, Mature Manufacturing Owners are also receiving IPPs. New IPP recipient categories include civil servants who are starting up a bonafide business, perhaps consulting back to their original employer. And PSB owners, Personal Service Business owners. PSBs are often considered ‘contracted employees’ and their legitimate deductions are limited, but they are allowed to fund their retirement from their business (hence an IPP).
IPP Phase 1: Onboarding
The IPP can be understood in 3 Phases:
Onboarding starts with Salary history calculated within an Illustration. There are 5 Numbers you care about in your Illustration.
IPP Phase 1: Onboarding — Buying Back Past Service
Your company ‘services’ your Pension. And you can determine, based on your Salary History and RRSP contributions, if you can Buy Back Past Service. Always have an Illustration generated to determine if or how much ‘past service’ you can contribute. Plus, you can ‘buy back’ the past service at anytime during the existence of your IPP, possibly just before you Exit/Retire.
IPP Phase 1: Onboarding — Bringing your RRSPs into the AVC account
You can bring your RRSPs into the AVC (Additional Voluntary Contribution) account of the IPP. And whether or not you used the RRSPs to buy back past service, and whether or not you contribute the $600 per year to your RRSP, the entire investment management fees for the IPP, DB and AVC accounts, are deductible by the corporation.
IPP Phase 2: Accumulation with Prescribed Growth
By law, Illustrations assume a 7.5% rate of return, as Inflation was 4% (around 1990) when the laws were written. The actual formula is 3.5% plus Inflation, per annum, net of fees. So if Inflation is 2%, your IPP investment must grow at 5.5% each year (net of fees). And that is why Rules Based Investing, Pension Style Investing, is key for IPPs, as Capital Preservation is paramount. Every 3 years, at a Triennial Valuation, your Nest Egg is examined to see if your IPP assets are on track.
IPP Corporate Deductions
As your sponsoring company pays for your IPP, there are 4 main deductions, all legitimate.
- Contributions; including the corporate cash portion of buying back past service
- Interest charges if you borrow to contribute to your IPP
- Investment management fees, and
- IPP fees and possibly provincial filing fees.
There can be ‘other’ fees but they are generally considered part of the above.
IPP Quick Summary
You can contribute more to your Nest Egg. And your company entirely funds the IPP. Legitimately.
IPPs and Creditor Proofing
No entity, Government or otherwise, can take your IPP from you. Divorce is another story.
IPP Phase 3: Exiting — Timeframe
There are many options to consider as the business ownership of the business ends. You’ve been in the Accumulation Phase of the IPP, and now, 2 years before decision to exit (sale, succession, winding down) occurs, please start communicating with your Trusted Wealth Professional and/or IPP Service Provider as to your options. But it is key that you start planning 2 years in advance.
IPP Phase 3: Exiting — Options
Upon Exiting the IPP, the DB portion of your IPP has 3 options:
- Take the Pension, with or without Terminal Funding, and you must keep an ongoing business and pay Accounting plus IPP fees.
- Not take the pension, transfer the assets back to a LIRA/LIF (depends upon your age). You may need to pay tax on the excess surplus assets (and then unlock half of the assets to an RRSP/RIF).
- Buy an annuity; guaranteed for life. Part of your retirement income stream strategy.
The AVC/RRSP assets return to RRSP/RIF (depends upon your age).
In all cases, your Trusted Wealth Professional and IPP Service Provider can help you with the Exiting options, this is where there is incredible value delivered to you in context of your Retirement Income Stream.
IPP Phase 3: Exiting — Terminal Funding
If and only if you are taking the Pension from the IPP can you ‘Terminally Fund’ the IPP. There are 3 areas where Terminal Funding can occur:
- Early Un-reduced Pension
- Bridge to CPP
- Indexed to Inflation.
In all 3 cases, the best time to begin consideration of these options is at R – 2, two years before retirement.
IPPs: 3 Frequently Asked and Common Questions
The 3 most frequently asked IPP questions are:
- What happens if I die; pre and post pension.
- What happens if I can’t fund?
- What happens if I get divorced.
Not to worry, the answers are in the short video above. And Death is explained below in a short video.
IPPs: Full Summary
A continuation of the Quick Summary above; a larger Nest egg through Buying Back Past Service and also through Terminal Funding. And a larger Nest Egg because your Trusted Wealth Professional utilized Rules Based Investing.
Note: There are a few IPP terms that need to be introduced, in a specific order, hence the Quick Summary and then Full Summary. Please enjoy.
IPPs: What Happens if I die?
If the Business Owner passes away while in the Accumulation Phase of the IPP the ‘Death Progression’ is Spouse, Beneficiaries and then Estate.
If the Business Owner passes away while in receipt of the Pension from the IPP. the Death Progression is Spouse, Beneficiaries and then the IPP Sponsoring Company.
Again, not to worry, the Government or any other entity doesn’t ‘take’ your IPP assets or pension.
IPPs: Federal Investing Regulations and Diversification
Federal Investing Rules (FIR) require Diversification; no more than 10% of your holdings in a single security. You can overweight sectors, you could pick 10 junior gold companies, you could pick Nortel, RIM, Enron, WorldCom, BreX, etc … as long as you are diversified. And you are allowed to be ultra-conservative as well as long as the investment are government guaranteed.
IPPs and other Retirement Vehicles (RCA and TFSA)
There is an image at the end of the short video that positions an IPP with an RCA (Retirement Compensation Agreement), the TFSA and RRSP. Of note, the IPP does not affect the TFSA at all, but reduces the RRSP contributions to be $600 per year.
IPPs: Triennial Valuations Explained
A great example of a Triennial Valuation is explained in the video using Looking Forward and Looking Back viewpoints. This is critical as the Investing portion of the IPP receives considerable scrutiny by the regulators. The Illustration projected forward at 7.5%. But the Triennial uses the Inflation figure from the Statistics Canada database. And all the figures at Net of Fees.
IPP Phase 2: Accumulation — Prescribed Growth with Rules Based Investing
This short video is an extension of the Triennial explanation video and it emphasized Capital Preservation via Rules Based Investing. Every 3 years your IPP is ‘valued’ at a Triennial Valuation, and the best way to achieve Prescribed Growth is to preserve capital wherever possible.
Both levels of Government, Federal and Provincial, care about your IPP. The Federal Government, CRA, views the IPP from a Corporate Tax standpoint. The Provincial government views the IPP from a Benefit to the Employee standpoint; in this case the Business Owner(s) is the employee.
IPP Phase 1: Onboarding — Buying Back Past Service Details
The example in the video, from an IPP Illustration shows that you can Buy Back $380,215 of Past Service. This Buy Back is comprised of $291,960 from RRSPs and $88,255 of Corporate Cash.
Note: Most IPPs start with greater than $250,000. Although this is not the norm anymore. In either case, always have an IPP Illustration performed for you.
IPP: First ‘Open Letter’ to Business Owners, Accountants and Investment Advisors
Although it may seem like another IPP ‘commercial’, the flexibility to NOT take the Pension greatly enhances the attractiveness of the IPP. In that regard, the IPP is a ‘super-sized’ RRSP, only for Business Owners. A great income replacement strategy for retirement.
IPPs Phase 1: Onboarding — 5 Illustration Numbers that matter
The 5 Illustration Numbers that matter:
- 1st Year Contributions, including Buying Back Past Service and utilizing RRSPs + Corporate Cash.
- 2nd Year Contributions
- 3rd Year Contributions
- Target at end of 3 Years; in other words, what are we striving for at the next Triennial Valuation
- Nest Egg size, forecast at 7.5%
There are a lot of other Numbers in the Illustration. Keep an eye out for these 5 Numbers and begin to understand if your business can fund your IPP.
IPPs: Second ‘Open Letter’ to Business Owners, Accountants and Investment Advisors
There are two ‘Camps’ surrounding an IPP; those that don’t understand the IPP and those that think everyone should have an IPP.
The answer comes down to Cash and Cash Flow. You are ‘servicing’ your pension, do you have the Cash for this ‘service’? The IPP is best maximized; when you have MPS (Maximum Pensionable Salary).
There are many ways to structure and implement IPPs. My guidance came from a ‘Big Bank’ executive who implemented 1000’s of the IPPs for business owners across Canada.
- MPS; Maximum Pensionable Salary, is best for servicing an IPP. A ‘strong’ cash position and ‘very strong’ cash flow are recommended for IPPs.
- Trust vs. Insurance Contracts. IPP are best offered as Trusts, given:
- there is a complete suite of investment Products available to the Investment Advisor,
- the ability to practice Pension Style Investing exists (aka Rules Based Investing), and
- there is ease for external investment management fee payment or IPP fee reimbursement.