As clients approach retirement, they need answers on their superannuation benefits. Registered Retirement Savings Plans (RRSPs) and government programs (CPP/QPP and OAS) are two of the main sources of retirement income, but the third—company pension plans in the form of defined-benefit or defined-contribution plans—is often the most complex.
In order to provide clients with valid retirement income analyses, advisors must understand the terms and conditions, as well as the options available, in every person’s specific plan.
An Individual Pension Plan (IPP) is a defined-benefit plan that can be particularly complicated. IPPs have been popular retirement tools for business owners and Canadian businesses to attract and retain high-level executives.
They can be customized to provide better retirement funding for high-income earners since they provide higher contribution limits than RRSPs; protection from volatile markets; and tax savings on contributions for the employer.
IPP participants nearing retirement age will need some guidance on the maturity options available to them, especially because some rules have recently changed.
For example, the 2011 Federal Budget restricts past-service contributions to IPPs, essentially reducing the opportunity for employers to contribute new funds to the IPP when employees have large RRSP assets or carry-forward balances in RRSP contribution room.
Another change from the 2011 Federal Budget requires IPPs to begin paying out a minimum amount to members in the year they turn 72—no matter what the original terms. As of 2012, IPP members will become annuitants of their plan in the year they turn 71.
As is the case with Registered Retirement Income Funds (RRIFs), each year following the year IPP members turn 71, they will be required to receive at least the minimum annual pension payments from their plans.
The amount will be the greater of the regular pension payable to the participant during the year according to the plan’s terms, and the minimum of what would have been paid had the member’s share of the IPP assets been held in a RRIF instead.
There are three ways of maturing an IPP:
- Pay out pension income directly from the plan;
- Transfer the assets to a Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF) in certain provinces; and under certain circumstances a RRIF in the province of Quebec; or
- Purchase an annuity.
Here is a discussion of each option.
1. Pay out pension income directly from the IPP
Since an IPP is a defined-benefit pension plan, it must provide members with a lifetime pension when members become annuitants. This pension carries a basic 66 2/3% survivor benefit with a five-year guarantee.
In other words, if the plan member dies, 100% of the pension will continue to be paid out for a period of five years from the date of the annuitant’s retirement and, thereafter, 66 2/3% of the pension will continue to be paid out to the surviving spouse.
Aside from this regular pension, plan members may be able to choose optional benefits. These options are stipulated in the plan’s terms and allow members to adapt:
- the amount of their pension incomes;
- the length of the guarantee periods; and
- the percentage of the survivor benefits to their needs.