First of all, an IPP allows you to make larger annual contributions than an RRSP (see the graph at right) but only after age 38, and not significantly more until about age 50. Also, the RRSP figure is a maximum contribution
while the IPP contribution is required, with an actuarial review each three years to make sure you're not behind either the contribution levels or the 7.5% required annual growth.
On the plus side, if the market lagged and you were behind, you can actually put in more than the annual figures, but on the other hand, the contributions and top-up could be onerous if markets dropped during the same years your own business suffered, just before the actuarial review, (a cost you are required to pay for as well).
As the chart on the left shows, one of the big features of the IPP is that your company makes your contributions, yet many are unaware this also negates your ability to make personal RRSP contributions, so these comparisons make sense beyond simple clarification.
The other point of this chart, is that if contributions are the same, there is no difference between an IPP and an RRSP, either for you or your company. The real value of the IPP comes in around age 50, when there is a larger difference in contributions, the business is more stable and you'll cut down on a few of the actuarial reviews. It also makes sense if you're selling the business or a large asset, as you can do a balloon payment for past service.
All of the above assumes that your objective is to increase your taxable income in retirement, but for many clients, that is not the case. Before taking steps to lock in more pension money, it makes sense to have a projection done based on RRSPs and other investments, to determine how much taxable income you already have accumulated; it may be more than you think. In such cases, we recommend other plans to increase non-taxable income to counter-balance. This way, you can lower your average tax rate in your retirement years, keep more of your
income and thereby have an added hedge against inflation and long term medical costs . |
