Individual Pension Plans

Transcription

1 Integrating IPPs in Fiscal and Retirement Planning June 16, 2010

2 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 1

3 Individual Pension Plans (IPPs) 2

4 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 3

5 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 4

6 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 5

7 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 6

8 Investment Gains and Losses 9% Surplus Return Objective 7-1/2% Deficit 5% Start Date Valuation Year Additional contributions can be made to shore up any deficit Some surplus can be retained without limiting contributions (up to 25% of benefit value) 7

9 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 8

10 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 9

11 IPP Case Study 10

12 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 11

13 Past Service Contribution 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 12

14 Projected Annual IPP Contributions vs. RRSP Age IPP RRSP $33,000 $22, $38,100 $24, $47,300 $28, $52,200 $32, $57,100 $37, $60,400 $41,826 13

15 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 14

16 IPP Solution versus RRSP only Plan Balances at end of year with additional contribution Age IPP solution RRSP only Advantage 65 $1,700,200 $940, % 68 $2,350,000 $1,286, % 70 $2,813,200 $1,574, % - Based on 7.5% return (Prescribed valuation rate for IPPs) - RRSP only column includes a seed equal to IPP transfer 15

17 IPP Market 16

18 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 17

19 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) 18

20 Higher Benefit Limits Maximum pension limit $2,600 $2,400 Now $2,494 for 2010 $2,200 $2,000 $1,800 Frozen at $1,722 per year of service for over 25 years $1,600 $1,400 $1,200 $1,

21 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 20

22 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 21

23 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 22

24 IPPs Common Questions 23

25 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 24

26 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 25

27 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 26

28 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 27

29 Retirement Compensation Arrangements 28

30 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 29

31 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 30

32 RCA Flow of money Company Splits tax deductible contributions equally between RCA Trust Remits 50% of realized income Pays benefits to Participant Refundable Tax Account Refunds 50% of benefits paid to RCA trust Participant Receives taxable RCA benefits 31

33 Questions???