individual pension plans - cifps · rca – highlights • 50% of contributions and realized...
TRANSCRIPT
Individual Pension Plans
Integrating IPPs in Fiscal and Retirement Planning
June 16, 2010
1
Individual Pension Plans
IPPs –Highlights
• Greater tax-sheltering than RRSPs• Contributions and expenses are tax deductible• May make up for investment losses• Funds are generally creditor protected
– Subject to family divisible assets• Ideal candidate is a business owner aged 40+, with
employment earnings
2
Individual Pension Plans
Individual Pension Plans Individual Pension Plans (IPPs)(IPPs)
3
Individual Pension Plans
What is an IPP?
• A Defined Benefit (DB) pension plan– Generates a Pension Adjustment (PA)
• Set up by a company usually for one person– Must be an employee of the company (T4 income)– Spouse may also participate, if an employee
• Designed to provide maximum benefits and therefore maximize contributions
4
Individual Pension Plans
IPPs – Applicable Legislation
• Income Tax Act– Sets maximum benefits and contributions– “Connected” persons: Owns directly or indirectly 10% of any
class of shares of IPP sponsor• Provincial pension legislation
– Sets minimum funding requirements– Many exemptions in QC, MB, BC, AB– PEI has no pension legislation
• Pension investment rules
5
Individual Pension Plans
IPPs – Taxation
• Contributions and expenses are tax deductible to the company– Including IMFs, if paid outside of IPP fund
• Funds accumulate tax-free• Benefits are taxable when paid out
– Can be split before age 65
6
Individual Pension Plans
IPPs – Types of Contributions
• Past Service Contribution– Generally since 1991– An RRSP transfer is usually required
• Current service contributions• Optional contributions at retirement• Contributions to make up for any investment losses
7
Individual Pension Plans
Return Objective7-1/2%
Valuation YearStart Date
Deficit
Surplus
9%
5%
• Additional contributions can be made to shore up any deficit
• Some surplus can be retained without limiting contributions (up to 25% of benefit value)
Investment Gains and Losses
8
Individual Pension Plans
IPPs – Options at Termination and Retirement
• Transfer to another retirement savings plan– Locked-in, except in Quebec and PEI
• Receive lifetime pension from the IPP– Allow additional contribution at retirement
• Purchase annuity from an insurance company
9
Individual Pension Plans
IPPs – Death Benefits
• Prior to retirement: Value of pension payable to• Spouse: transferred to RRSP (may be locked-in)• Beneficiary or estate (no spouse or waived): payable in cash
– An additional contribution may be possible• After retirement: Depends on terms of lifetime pension
– Normal form: payable to surviving spouse at 66.7% with a 5-year guarantee
10
Individual Pension Plans
IPP Case StudyIPP Case Study
11
Individual Pension Plans
A Business Owner
• Aged 58 on January 1, 2010• Earned more than $125,000 since 1991• Past service since January 1, 1991• Contributed maximum to RRSPs
– Accumulated over $500,000• Wants to set up an IPP in 2010 and retire at age 70
12
Individual Pension Plans
• Can credit past service from January 1, 1991• Company can contribute $237,800• An RRSP transfer of $367,950 must be made
– Would be less if unused RRSP contribution room existed– Past service is adjusted if unable to make transfer
Past Service Contribution
13
Individual Pension Plans
Projected Annual IPP Contributions vs. RRSP
Age IPP RRSP2010 58 $33,000 $22,0002012 60 $38,100 $24,4872015 63 $47,300 $28,7532017 65 $52,200 $32,0032020 68 $57,100 $37,5792022 70 $60,400 $41,826
14
Individual Pension Plans
IPP – Contribution at Retirement at age 70
• An additional amount of $259,600 could be contributed– Some benefits cannot be pre-funded– Can take some money out of the company prior to retirement
15
Individual Pension Plans
IPP Solution versus RRSP only
Plan Balances at end of year with additional contribution
Age IPP solution RRSP only Advantage65 $1,700,200 $940,000 181%68 $2,350,000 $1,286,900 183% 70 $2,813,200 $1,574,700 179%
- Based on 7.5% return (Prescribed valuation rate for IPPs)- RRSP only column includes a seed equal to IPP transfer
16
Individual Pension Plans
IPP MarketIPP Market
17
Individual Pension Plans
IPPs in Canada
• Started in the 1980s• About 18,000 registered pension plans in Canada of
which close to half are IPPs• More than 4,000 established in the span of 3 years
– Shows a rapidly growing interest for IPPs– Only tip of the iceberg
18
Individual Pension Plans
Why is the demand for IPPs increasing?
• Baby Boomers are getting older (50+)• Greater attention to retirement issues than ever before• Better known by accountants• Not subject to provincial pension legislation in certain
jurisdictions (BC, MB, PEI, QC)– No minimum funding required
• Greater access to IPP funds– A portion can be unlocked in many provinces (100% in QC)
• Higher benefit limits (45% increase over last 7 years)
19
Individual Pension Plans
Higher Benefit Limits
Maximum pension limit
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
$2,200
$2,400
$2,600
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Frozen at $1,722 per year of service for over 25 years
Now $2,494 for 2010
20
Individual Pension Plans
Ideal Candidates
• Business owners– Key employees
• Incorporated professionals– Spouse’s past service before incorporation
• Age 40 to 71• T4 employment income (dividends do not qualify)• Willing to maximize tax-sheltered retirement savings
21
Individual Pension Plans
Typical Sales Process
• Introduction of IPP concept to clients / prospects– Using sample IPP illustrations– If interested, get information required
• Review of a customized IPP illustration• Get answers to questions of clients and accountants• Sign documents and open investment account
22
Individual Pension Plans
Qualities of Great IPP Providers
• Excellent Sales Support services– Before, during and after the sale
• Expertise of IPP team– Able to handle all complex cases– Internal Research & Compliance Team– Pension consulting as plan matures and needs evolve
• Experience in all Canadian jurisdictions
23
Individual Pension Plans
IPPsIPPsCommon QuestionsCommon Questions
24
Individual Pension Plans
Past Earnings from Different Companies
• IPP of ABC and affiliated companies• Contributions must be made by companies that paid
earnings– Past service– Current service– Deficits
• Earnings from a company that no longer exists are fine if that company has been merged into a currently controlled company or there was an asset sale
25
Individual Pension Plans
Transfer of IPP Sponsorship
• From OpCo to HoldCo– Participant must become employed by HoldCo
• From Company A to unrelated Company B– Participant becomes employee of Company B– Assignment agreement
26
Individual Pension Plans
Transfer of Pension Plan’s assets in new IPP
• IPP sponsor must be a bona-fide company generating revenues
• Participant’s earnings similar to before the transaction• IPP will be scrutinized by Canada Revenue Agency
27
Individual Pension Plans
IPPs versus Dividends
• Approaches are about equivalent in terms of tax efficiency• IPP approach becomes more advantageous when
deductibility of IMFs is taken into account– At 2%, the total IMFs for an IPP set up at age 40 may be up
to more than $1.3 million by age 65
28
Individual Pension Plans
Retirement Compensation Retirement Compensation ArrangementsArrangements
29
Individual Pension Plans
RCA – Highlights
• Retirement benefits on earnings above maximum covered in an IPP
• Set up by a company for an employee• Contributions are deductible to the Company
30
Individual Pension Plans
RCA – Highlights
• 50% of contributions and realized investment income must go to a Refundable Tax Account– Objective: minimize realized investment income
• Can put conditions for admissibility to benefits– Great tool for key employee retention
• Funds are creditor protected
31
Individual Pension Plans
RCA – Flow of money
CompanySplits tax deductible contributions equally between
RCA TrustRemits 50% of realized income
Refundable Tax AccountRefunds 50% of benefits paid
to RCA trust
ParticipantReceives taxable RCA benefits
Pays benefits to Participant
Questions ???
D4_11.00c_N
ormandFrenette__IntegratingIndividualPensionPlansIntoFiscalA
ndRetirementPlanning.pdf 6/15/2010 5:02:02 PM