An Individual Pension Plan is a type of defined benefit pension plan that many successful entrepreneurs may want to consider for their retirement as an alternative to RRSPs. The reason that RRSPs can be a insufficient on their own is that the allowable contributions are limited to 18% of your income, up to a maximum of $21,000 in 2009.
A defined benefit pension plan is paid out based on a formula related to age and years of service. This form of pension is quickly becoming extinct in many corporations that now favour a defined contribution benefit where the payout is dependent on how the underlying investments do.
IPPs allow a business owner to set up a defined benefit pension plan for themselves where their company pays the majority of the contribution to the plan. The amount that can be contributed depends on the income, years of service and age of the person. Years of service can go as far back as 1991, and for those that do, the first year contribution could be over $400,000!
Since this pension plan would involve $100,000 or more in annual contributions, it’s obviously for well-off businesses that have some money to spare. The amount paid by the company is however reduced as it’s contribution is a tax-deductible expense. If you think an Individual Pension Plan might fit your own financial situation, be aware that this is a complex arrangement and you would need to talk with a financial planner that is very experienced with benefit plans.
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