The Canada Revenue Agency has approved a new method of saving for retirement that is particularly suited to business owners, entrepreneurs and incorporated professionals. The Personal Pension Plan (PPP) is unlike any other registered pension plan in Canada. It provides three different sub-accounts that can offer plan members a convenient and flexible way to save for their retirement. Despite its obvious advantages, the offering is a relatively new option on the pension front, and very few prospective users are even aware of its existence, let alone understand the benefits that the plan offers.
The Personal Pension Plan (PPP) is a registered pension plan designed exclusively for business owners and incorporated professionals. It is a very powerful way of saving for your retirement because you can save your money and protect your assets in a very flexible way. It is composed of three distinct sub-accounts:
(1) The Defined Benefit (DB) sub-account,
(2) The Defined Contribution (DC) sub-account, and
(3)The Additional Voluntary Contribution (AVC) sub-account.
The sub-accounts allow plan members to choose how to save their money in any given year. Understanding how the three sub-accounts work together to help clients is important.
(1) Defined Benefit Sub-account
Monies contributed to and saved in this account are pre-determined. Defined benefit retirement calculations are based on a formula that considers years of service, annual earnings, and the age of the plan member. The method of benefit accrual in this sub-account is identical to Individual Pension Plans (IPP). The maximum DB contribution limit for 2015 is $40,242.75. That level of contribution would be for a 64-year old. The DB sub-account is designed to maximize the tax deductions available to a plan member in a given year. Up to 50% of the contributions can come from the plan member (out of salary by payroll deductions). There is always the option of having the corporation pay 100% of these contributions.
(2) Defined Contribution Sub-account
This is also known as the money purchase sub-account. Retirement income derived from this account is not pre-determined because it is based on the value of the account at the time you choose to retire. The corporation under the DC sub-account is required to contribute 1% of their T4 income, if the member has elected to save under the DC method that year. The PPP permits plan members to switch between DB and DC contribution methods. While the DC account functions like an RRSP, DC assets are trade-creditor protected, whereas RRSP funds are not. The maximum DC contribution limit for 2015 is $25,370. If, for example, a member is receiving a salary of $100,000, the corporate contribution to the DC sub-account in that year would only be $1,000. This provides an ‘escape hatch’ when a business is facing uncertain cash flows.
(3) Additional Voluntary Contribution Sub-account
Plan members that choose to save under the DC option of the PPP can choose to make additional contributions to the AVC sub-account as well. While employers, or sponsoring corporations, make a mandatory 1% of T4 income contribution into a DC account, an employee can contribute between 0% and 17% of his or her T4 income to the AVC account. This means that the plan member can deduct the AVC contributions from their personal taxable income and obtain refunds based on their marginal tax rates. While AVC monies are treated as if they were DC assets, the funds are not locked-in by pension laws. If plan members wish to withdraw their AVCs, this can be achieved by filing a plan amendment. In addition, the AVC sub-account can receive the member’s existing RRSP assets on a tax-deferred basis at any time after the plan has been registered. This provides creditor protection to these RRSP assets, and enables the corporate sponsor of the PPP to deduct – from corporate income taxes – all of the investment management fees that attach to those funds.
3 Subaccounts Working For You
Plan members who save for retirement under the PPP will enjoy all the benefits of convenience and flexibility. The DB and DC contribution methods provide business owners and professionals with a choice no other IPP offers. More importantly, the Personal Pension Plan, a CRA- approved method of saving for retirement, provides plan members with the assurance that their hard earned money is protected whether it accrues as DB, DC, or AVC assets.
The PPP is a relatively new innovation, and is not yet offered by many traditional pension providers. The plan is currently available through pension provider INTEGRIS. Rest assured that regardless of the method you choose to save for retirement, the pension provider (INTEGRIS) has a legal duty to always act in your best interest. In fact, INTEGRIS is bound by pension legislation to ensure your pension plan is administered in a manner that complies with federal and provincial regulations.
The Defined Benefit (DB) and Defined Contribution (DC) contribution methods provide business owners and professionals with a choice no other IPP offers. More importantly, the Personal Pension Plan, a CRA- approved method of saving for retirement, provides plan members with the assurance that their hard earned money is protected whether it accrues as DB, DC, or AVC assets.
Jennifer Black is president of DFS Private Wealth, recognized by the Mississauga Board of Trade as Small Business of the Year. To learn more about the Personal Pension Plan, and to receive a complimentary retirement savings illustration, contact DFS Private Wealth.
Sources: INTEGRIS Pension Management Corp.