MODULE 11: UNIT 3 Individual Pension Plans

Question 1

Individual Pension Plan (IPP) (Executive Pension Plan)

Answer 1

• Employee sponsored
• defined benefit registered pension plan created for the benefit of qualifying individuals because of the unique constraints imposed by retirement savings legislation

Question 2

Designated Plan

Answer 2

• defined benefit registered pension plan
• not maintained pursuant to a collective bargaining agreement and where more than 50 per cent of the total pension credits or pension adjustments (PAs) for plan members are for either connected individuals or persons whose income exceeds 2.5 times the YMPE

Question 3

Plan Fit

Answer 3

• Designated plans are often established for the benefit of a top executive group or in owner-manager situations
• Individual pension plans offer successful, well-established entrepreneurs the opportunity to fund some of their retirement needs through contributions from the company

-Advantage over an RRSP:
individual can maximize his personal pension benefits while meeting the rules prescribed by the CRA

Qualifications for IPP:

• Be an employee of an incorporated company, which is taxable under the act
• T4 income (not dividend or investment income)

-an individual pension plan is most suited for executives or owner-managers of incorporated companies, who are forty or older, with regular annual earnings of at least $100,000

Question 4

Plan Design

Answer 4

• Assumes normal retirement age of 65
• utilize a career average earning formula, not final/best earnings
• Maximum annual benefit is the same as other defined benefit plans
• normally established as non-contributory

Question 5

Past Service

Answer 5

• for IPP members who are not considered connected individuals
• Same as a regular defined benefit pension plan

-only post-1991 service can be recognized

Question 6

Plan Value: Tax Savings

Answer 6

-Money contributed to an individual pension plan is not considered salary, so it can be contributed to the individual pension plan without attracting payroll taxes

Question 7

Plan Value: Creditor Protection

Answer 7

An IPP is entitled to all of the creditor protection measures afforded to any registered pension plan

Question 8

Plan Value: Savings Opportunity

Answer 8

• the employer has an obligation to make the required annual contributions
• , in deciding between an IPP and an RRSP, it is important to consider both the short and longer-term cash flow projections

Question 9

Plan Value: Indexation

Answer 9

• up to a CRA Prescribed limit
• can be incorporated into the income projections for an IPP, which then translates into contributions required by the employer to fund the required income

Question 10

Plan Value: Target Income

Answer 10

While the CRA have rules dictating the liberties of the assumptions incorporated into IPP income projections, the fact that the employee knows the specifics of his projected retirement income formula gives him an advantage over an RRSP

-projected level of income under an IPP is guaranteed

Question 11

Plan Value: Market Risk

Answer 11

• investment performans lies with the plan sponsor/employer.
• When volatile investment markets affect the investment performance of the IPP funds, responsibility lies with the employer to increase required contributions in order to fund the required level of retirement benefits provided in the plan

Question 12

Plan Value: Access to Funds

Answer 12

• Same as regular defined benefit pension plan
• Employer is required to contribute necessary funds to maintain plan’s solvency
• cannot easily access unless an important need or emergency arises

Question 13

Plan Value: Long-Range Planning

Answer 13

RRSPs provide the opportunity for long-range financial planning through the establishment of a spousal RRSP

Question 14

Plan Value: Asset Ownership

Answer 14

Under an IPP, the assets in the plan belong to the member; upon his death and the death of his spouse or partner, any remaining benefits are paid to the estate