GROUP SAVINGS AND RETIREMENT The Personal Pension Plan (PPP) An Effective Retirement Savings Solution for Professionals and Business Owners
An Effective Retirement Savings Solution for Professionals and Business Owners For most workers, primarily middleincome contributors, an RRSP is an efficient retirement savings vehicle. However, an RRSP may not meet the needs of higher-income indivi duals, such as incorporated professionals and business owners. With higher incomes, RRSP contributions become limited and cannot generate sufficient savings to allow one to maintain a more comfortable lifestyle in retirement. Since 2012, there is another way for you to build a retirement income that lives up to your expectations: the Personal Pension Plan (PPP) developed by INTEGRIS Pension Management Corp. The PPP is a registered pension plan for a single member, designed specifically for business owners. It offers higher tax deductions and allows for the maximization of retirement savings under current legislation. The PPP is a sound alternative to the traditional method of simply contributing the maximum amount to an RRSP.
What is a PPP? The PPP is a Canadian pension plan registered with the Canada Revenue Agency (CRA) and provincial pension authorities, where required. It is a combination pension plan offering both a defined contribution and a defined benefit option. At the beginning of each year, the PPP is designed to allow plan members the flexibility to determine which plan component and contribution method to choose. Unlike traditional retirement savings plans, the PPP is flexible and is easily custom tailored to accommodate each member s unique financial situation and personal requirements. Defined Contribution (DC) means that the employer contributes a specified percentage of the employee s annual salary to the Defined Contribution Account of the plan. At the very least, the employer will make a mandatory contribution of 1% of the PPP member s T4 income to a DC Account when the member chooses the DC option of retirement savings. Defined Benefit (DB) means that the pension benefit payable in retirement is determined by a specific formula. This formula corresponds to 2% of the average of the best three yearly salaries indexed to retirement for each recognized year of service. This benefit is subject to the maximum amount prescribed by the Income Tax Regulations. The defined benefit contributions required to finance the plan vary from person to person, based on factors such as age and income. An actuary establishes the annual contribution amount. The PPP also allows the member to make Additional Voluntary Contributions (AVCs) and these are subject to limits in the Income Tax Act (Canada) and its Regulations. AVCs enable plan members to contribute to their retirement savings over and above the amount an employer deposits into an employee s DC Account. Employee voluntary contributions are treated as DC assets. The combined employer/employee annual contributions must not exceed 18%. AVC Accounts are also designed to permit RRSP transfers. All of an employee s existing RRSPs are transferable into his/her PPP without being identified as new contributions. RRSP transfers into AVC Accounts will not affect the additional maximum annual amount a plan member or the company can contribute in a given year. The retirement income generated by a PPP is always greater than the income provided by an RRSP because at any age, someone contributing the maximum pensionable salary can always contribute more to a PPP than to an RRSP. Maximum tax relief and maximum retirement savings The PPP always allows for higher contributions than an RRSP, thereby enabling PPP clients to save significantly more for retirement than through an RRSP. Since the PPP is a registered pension plan, all contributions also grow on a tax-deferred basis. The PPP can be entirely funded by the employer contributions. In most cases, and under certain conditions, lump-sum contributions can be made for past years of service as far back as 1991. This past service funding helps maximize retirement benefits, results in additional tax-deferred growth and can create additional corporate tax savings. The employee is not required to make contributions but can do so where a qualifying transfer for purchasing past service is required or if AVCs are made. Therefore, other than RRSP transfers and AVCs, employees make no contributions. All plan costs are also tax-deductible. For example, IMF/MER and PPP fees are tax-deductible to the company sponsoring the PPP. Comparison between an RRSP and a PPP Comparison between the capitalization of an RRSP and a PPP (as at January 1, 2015) $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $3,595,799 $2,971,675 $2,492,843 Assumptions Client age: 50 Income: $150,000 Salary increase: 5.5% * Rate of return: 7.5% * Payment indexing after retirement: 3% * Retirement age: 65 * Set by the CRA $500,000 $0 Age 50 Age 55 Age 60 Age 65 PPP including past years of service PPP without past service RRSP 1
Comparison between an RRSP and a PPP RRSP Income tax Contributions deductible for the employee. Contribution limit Retirement benefit Investment risk 18% of the previous year s earned income, subject to the CRA maximum, less the pension adjustment (PA). Retirement income depends on the accumulated amount and therefore, the total contributions made and the investment returns. The employee takes the risk. Poor investment returns reduce the employee s final retirement benefits. PPP Income tax Contributions and plan costs deductible for the company and the employee. Contribution limit DB Established by an actuary according to the CRA rules. Retirement benefit Retirement income guaranteed and determined by a specific formula. Investment risk The employer takes the risk. Poor returns lead to an additional tax-deductible contribution for the company. The employee s retirement benefits are not reduced. The PPP offers many benefits Tax deductions PPP contributions and costs are tax-deductible and paid by the company. Employees contributions offer personal tax deductions. Creditor protection Unlike most RRSPs, the PPP is creditor-proof because its assets are exempt from seizure under provincial pension laws. Flexible contribution options The PPP s flexible design allows business owners to switch their participation in the PPP to the Defined Contribution provision in difficult financial years and back to the Defined Benefit provision when the company is doing well. Tax-deferred capitalization The PPP provides an opportunity for continued tax deferral after retirement if the member elects to take a pension from the PPP. Capitalization of past years of service Under certain conditions, it is possible to contribute for recognized years of service before the PPP was established. For this to occur, the company must have paid the member T4 income (salary, bonuses etc. but not dividends). Terminal funding at retirement The PPP provisions can be modified at retirement to provide the following enhancements to the pension benefits: indexation of the pension to inflation, collecting an early retirement pension, unreduced and temporary supplemental pension until CPP benefits are available. These enhancements result in an extra company contribution, which is also tax-deductible for the company. Fiduciary oversight INTEGRIS Pension Management Corp. acts as the delegated administrator of the PPP and has a fiduciary duty, which ensures that the plan will be managed in accordance with applicable legislation. This provides professional services and compliance oversight that were previously 2 unavailable in the Canadian marketplace for small incorporated professionals and business owners.
Appropriate for all ages The PPP has a flexible plan design that allows plan members to move between the Defined Contribution and the Defined Benefit components of the plan. This flexibility means that the member can benefit from participation in the Defined Contribution component while he/she is under age 40 and then participate in the Defined Benefit component until retirement. This combination plan design allows the member to contribute more, accumulating more assets under the PPP than is permitted under RRSP rules. Assets owned by the employee Upon retirement and in case of plan and employment termination, the surplus belongs to the member and is not taxable as long as it is not withdrawn. Upon retirement, and under certain conditions, the surplus can provide additional income to the member. The surplus can also stay in the plan to fund the pension benefits of family members employed by the company. Fees paid by the employer The fees are paid by the employer and are tax-deductible for the employer. Freedom of choice at retirement The PPP provides the member with three different options upon retirement: Use the funds to purchase a life annuity (including a joint life annuity guaranteed for up to 15 years). Maintain the PPP to pay a monthly pension. Roll the funds (subject to the CRA maximum) into a locked-in retirement instrument (Life Income Fund) or a non-locked-in retirement instrument (Registered Retirement Income Fund), depending on the applicable legislation. If the company is sold Transferring cash from the company to the PPP upon sale of the business can assist with other tax exemptions (lifetime capital gains exemption) and also make it easier to sell the assets. The PPP can also be assigned to a new company prior to the sale. Our services All fees charged for the PPP are tax-deductible. These fees include the following services: Establishment of the plan and monitoring of your plan by a qualified Group Savings and Retirement advisor Preparation of the plan text and all other documents and forms required to register the PPP Registration of the plan with the Canada Revenue Agency and the applicable provincial authority, if required Required amendments to the plan in response to changes in applicable legislation Initial actuarial valuation and subsequent actuarial valuations (every three years in most cases), to determine the contribution amount and ensure the plan is properly funded Valuation required for the purchase of past service Annual information returns Annual member statement Assistance with administration issues Calculations of the termination of employment, death and retirement benefits Record-keeping of the plan administration data Annual calculation of the pension adjustment (PA) Monthly report on investment fund returns Various investment-related publications: Monthly Update, Quarterly Update, Annual Financial Report on Investment Funds 3
Our investment options When you select the PPP, you have access to a full range of investment options, including guaranteed investments and investment funds. Guaranteed investments, offered for 1- to 10-year terms, are designed for investors who are primarily seeking stable returns and capital protection at maturity. The assets invested in guaranteed investments are protected by Assuris (a non-profit organization that protects Canadian insureds when a life insur ance company becomes insolvent), according to the applicable terms and conditions. Investment funds offer a wide range of risk levels and return perspectives. In fact, our complete line of funds allows investors to maximize the diversification of their assets, for both asset categories and investment approaches. No minimum amount is required to invest in investment funds and assets can be redeemed at any time. To meet our clients varying needs, many of our funds are managed by external investment firms. We do not charge switching fees when moving assets from one fund to another. A retirement savings solution The PPP: A profitable tool for high-income individuals to accumulate additional retirement income We re familiar with all aspects of establishing a PPP and our expertise guarantees top-quality service. We feel that the PPP is one of the best-kept secrets in retirement planning for entrepreneurs. If you would like to obtain an illustration of the amounts that you can contribute to a PPP and the resulting benefits you can obtain from it, complete the form inserted at the end of this document and email it to one of our regional offices (see overleaf for contact information). We will prepare a free, no-obligation PPP illustration for you. Just mail in the completed form or contact us directly. We d be happy to answer all your questions and help you establish a PPP. 4
Regional Offices TORONTO 522 University Avenue, 13th Floor Toronto, ON M5G 1Y7 Telephone: 416-585-8917 or 1-877-902-4920 torontogrouppensions@ia.ca CALGARY 777 8th Avenue S.W., Suite 2000 Calgary, AB T2P 3R5 Telephone: 403-218-3248 or 1-888-532-1505, ext. 248 groupsavingsprairies@ia.ca VANCOUVER 1188 West Georgia Street, Suite 1910 Vancouver, BC V6E 4A2 Telephone: 604-689-0388, ext. 223 or 1-800-557-2515 groupsavingsbc@ia.ca ia Financial Group is a business name and trademark of Industrial Alliance Insurance and Financial Services Inc. ia.ca F50-454A-5(15-09)