The Personal Pension Plan (PPP) is gaining popularity among Canadian business owners and professionals for several reasons. Unlike the Individual Pension Plan (IPPs), the PPP is a combination pension plan that is specifically designed to help business owners and incorporated professionals navigate the various economic cycles associated with running a business.
While plan members can choose to fund their pension through the traditional Defined Benefit (DB) or IPP method, it is the Defined Contribution (DC) aspect of the PPP that alleviates the financial burden associated with funding a pension during a depressed economic cycle. Accruing pension benefits using DC funding rules requires plan members to merely contribute 1% of their T4 income.
The contribution flexibility component of the PPP has another equally significant advantage. While traditional IPP plans are intended to benefit plan members who are over 40-years old, the PPP is an indexed product that outperforms traditional retirement savings plan in terms of tax deductions at any age. Our uniquely flexible contribution methods ensure our clients maximize their retirement savings, while minimizing corporate taxes, at every stage of their lives.
In fact, the PPP is the only Canadian retirement solution that allows plan members to choose how to accrue retirement savings and avoid the large financial costs associated with mandatory defined benefit contributions.
Business owner’s concerns about retirement
– Not being able to save or contribute enough to RRSPs because the contribution limits don’t keep pace with income
– Lack of creditor protection that could damage personal and family financial health
– Cost of investing in RRSPs may not be tax-deductible and might eat away at returns
– Interest costs are not tax-deductible when borrowing to contribute to RRSPs
– No one to look after the business owner’s best interests
– Harvesting the growth of the business and having a steady income flow
Individual Pension Plan (IPP)
The IPP, established in 1991, is an antiquated way of saving for retirement. The IPP’s contribution structure is rigid. It does not permit plan members to avoid the financial burden associated with funding a large DB plan during periods when cash flow is reduced. Also, IPPs are age-dependent. There is little financial benefit associated with participating in an IPP for people under 40 years.
IPPs are associated with the following problems:
– Expensive to set-up and maintain
– Plan member must pay for each pension plan administrative service separately
– Must continue to contribute during bad financial times – places unnecessary financial strain on the corporation
– Administratively complex to manage
– Burdensome – plan members must administer their own plan
– Lack of contribution flexibility – cannot adapt to changing business cash flows
– Lack of economies of scale
Personal Pension Plan (PPP)
The PPP is designed to fit the needs of business owners and professionals, and provides solutions to issues within the IPP.
The PPP’s features:
- Pension plan structure – since the structure relies on pension rules rather than RRSP rules, there is an ability to increase retirement savings by approximately $1 million above and beyond the RRSP maximums. The PPP relies on the same federal and provincial pension legislation that governs traditional IPPs. However, the Personal Pension Plan includes the Defined Contribution (DC) accrual method. The PPP is the only combination pension plan in Canada. It is a CRA approved method of saving for retirement.
PPP members will access more tax savings for their business and boost retirement savings by more than 60%.
A 45-year-old who earns $140,000 will save $738,908 more in a Personal Pension Plan when they retire. Between now and retirement, this person will lose $136 per day if they do not upgrade to a PPP.
- Combined pension plan
- Defined Benefit – the traditional contribution method that characterizes conventional IPPs.
- Defined Contribution – plan sponsor is required to contribute a maximum 1% of plan members T4 income. An employee can choose to contribute as much as 17% more, of T4 income, to an Additional Voluntary Subaccount (AVC). The voluntary AVC contribution will reduce an employee’s personal income taxes.
- Additional Voluntary Contribution (AVC) – Voluntary contributions are placed into a Subaccount contributions and are strictly voluntary. These assets are covered by pension legislation and thus trade-creditor protected. However, these funds are not locked-in. While RRSP assets can be transferred tax-free into the AVC account, plan members can also transfer assets out of the Subaccount back into an RRSP if they require the funds.
- Robust creditor protection – pension laws ensure all pension plan assets are trade-creditor protected. RRSP assets often do not receive the same protection.
- New corporate tax deductions – the PPP generates new and additional tax deductions/savings that are not available to RRSPs: buying back past service, terminal funding, special payments and investment management fees.
- HST refund – pension plan administrators can claim the 33% HST refund that is not available to RRSP savers.
- Fiduciary oversight & administrative responsibility –the pension provider (INTEGRIS) is legally obligated to act in plan members’ best interests. Practically, the provider negotiates service provider fee reductions, transfers group discounts to plan members and they cap fees, among other things. Additionally, the pension provider ensures member plans comply with provincial & federal legislation and complete and file all necessary documentation. The PPP allows the client’s corporation to delegate plan administration and compliance responsibilities to the pension provider offering a simplified turnkey solution.
- Turnkey solution – the pension provider offers the services a plan member will require to manage a pension plan – all under one roof. This includes actuarial services, pension officers, and pension-related legal advice.
Client-controlled custody and investment management – business owners can enjoy the benefits of receiving first-rate money management through their trusted financial advisor, while having a secure and tax-efficient pension plan through the provider.
For inquires about the Personal Pension Plan, and to receive a complimentary retirement savings illustration, contact us at DFS Private Wealth. We’re happy to introduce and discuss this pension plan option to business owners, entrepreneurs and professionals!
Sources: INTEGRIS Pension Management Corp., Statistics Canada
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