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  The Companion Advisor: Retirement Planning
Individual pension plans can generate healthy tax savings and peace of mind throughout retirement

Are you over 40 and earning a sixfigure income? Why not consider looking beyond a Registered Retirement Savings Plan (RRSP) to build your nest egg. For the right person, Individual Pension Plans (IPPs) can generate significant tax advantages beyond those provided by an RRSP. Additionally, an IPP can also produce higher pension benefits.

An IPP is a defined benefit pension plan- if you are a business owner or senior executive, an IPP offers both maximum tax relief and a maximum retirement pension. The result? You won't have to rely solely on your RRSP's performance to provide a long and happy retirement. That's because IPPs also offer guaranteed lifetime income. Any surplus in the plan belongs to you. This is an advantage IPPs have over other pension plans where any surplus stays in the fund and is used by the company to pay for benefits for other members of the plan.

Do you qualify for an IPP?

"If you are in your 50s, running your own incorporated business and earning a six-figure income," says Louise Guthrie, Assistant Vice-President, Manulife Investments Tax and Regulatory Services, "you're in a financial position to seek a more aggressive tax deferral arrangement than exists with your RRSP. If you run the business with your spouse, you could be ideal candidates for a two- i person IPP."

To qualify for an IPP, you must:

  • Have employment income reported on a T4
  • Be an employee of an incorporated company; and
  • Be age 40 or older and earn an income of at least $75,000 from the company sponsoring the IPP

What are the advantages of an IPP?

  • Employees over age 50 enjoy an annual maximum contribution that is at least $6,000 higher than the maximum contribution for an RRSP
  • Pension benefits are protected from creditors under pension legislation, unlike most RRSPs
  • Guaranteed lifetime income the IPP offers a predictable retirement income. An actuary determines the current annual funding requirements of the future retirement income
  • As you age, contributions to the plan increase. The amount depends on your salary, age, and years of service with the company. If past service is being provided and you have contributed to an RRSP after1990, you must transfer your RRSP funds to the IPP. The company then pays the balance of the cost to provide for past service from 1991.
  • IPP contributions and expenses are fully tax deductible to the business. If you borrow money or amortize the past service cost, you can deduct the interest charges.
THE IPP ADVANTAGE
Contribution Comparison - Age 55 to 65
Year
IPP
RRSP
Past Service
2004
23,600
15,500
114,400
2005
25,438
16,500
(company)
2006
27,346
18,000
2007
29,397
18,990
2008
31,602
20,034
2009
33,972
21,136
2010
36,520
22,299
2011
39,259
23,525
2012
42,203
24,819
2013
45,368
26,184
The chart above demonstrates how the IPP contribution exceeds the indexed RRSP limit each year. It also shows the additional amount of past service the company pays the first year, in addition to the transfer of $182,300 from your RRSP.


IPPs have drawbacks

While ideal savings vehicles for many, IPPs are not for everyone. It's important to remember IPPs are defined benefit pension plans and not RRSPs with higher limits. At retirement or if you leave the company or decide to wind up the plan - any surplus that is not required to pay for the promised benefits is paid to you in a lump sum and is fully taxable. You must also pay for actuarial and administrative services as well as provincial filing fees that don't apply to an RRSP.

Most actuarial firms will charge the same to administer an IPP as any other type of defined benefit plan. In addition to the actuarial and administration fees - other fees could include annual provincial filing fees and trustee fees, where applicable. Your advisor will guide you to an actuarial firm that best reflects your needs.

"Before making any decisions, speak with your financial advisor and be sure you understand all the benefits and drawbacks to IPPs," says Louise Guthrie. "To make the most of your IPP, you've also got to have a long-term financial plan in place as well as a firm handle on your income flow."

Note: The information contained in this article was provided by Manulife Investments and displayed by Fiscalagents.com for information purposes only. It is not intended to provide specific legal, accounting or tax advice and should not be construed as such. Individuals should consult with their professional advisors to ensure that any information provided is applicable and appropriate to their specific situation.

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Companion Advisor
Individual pension plans can generate healthy tax savings and peace of mind throughout retirement

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Innovative strategies for a worry-free retirement

Is the RRSP dead?

Tips and more to help you make the most of your RRSP!

Registered Retirement Savings Plans: More than just a tax break

RRIFs:- Registered Retirement Income Funds

Calculating your retirement needs

Factors to weigh when choosing your RRSP investments

RRSP contribution or mortgage repayment?

Women and RRSPs: Just do it!

Why RRSPs should be the cornerstone of your portfolio

Where retirement is concerned, borrow for tomorrow



The Money Management Newsletter:
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RRSP Planning
w Retirement Income Planning