Planning for retirement has gotten increasingly difficult for Canadians in general, but when it comes to business owners or the self-employed, having a steady income after leaving the workforce can be hard to imagine. One option incorporated professionals may want to consider are Personal Pension Plans, a vehicle meant to allow them to both save and invest, all while making the most out of the tax breaks available to them.
What’s a Personal Pension Plan
A Personal Pension Plan is a registered retirement fund available in Canada that combines a defined benefit plan, a defined contribution plan and an additional voluntary contribution sub account.
“It gives the business owner or the incorporated professional – the member –complete control over how much money goes into the plan each year, and therefore it opens up planning opportunities that did not exist under the more traditional models,” said Jean-Pierre Laporte, a pension expert and the chief executive of Integris Pension Management Corp., a private firm that pioneered the PPP model in Canada.
Who is Eligible for a Personal Pension Plan
The plan is geared toward business owners and incorporated professionals, such as doctors or lawyers.
Anyone who is self-employed but not incorporated wouldn’t be eligible, and Personal Pension Plans also wouldn’t be ideal for anyone wishing to have 100 per cent access to their cash at all times, because mandatory contributions are locked in by pension laws. Money deposited in a pension plan usually can’t be accessed until age 55, to ensure that there’s something to retire on.
These plans are also not recommended for anyone who’s hoping to make it rich by going all in on a single investment. Pension plan laws dictate that a person can’t put any more than 10 per cent of the pension’s funds in any one security, so there must be at least 10 investments within a pension fund.
How Does a Personal Pension Plan Work
Plan members can switch each year between defined benefit and defined contribution accrual, depending on their needs at any given time, and be involved in the investment decisions. Those who’d rather leave the thinking to the professionals can still rely on their money manager, as they would with an RRSP.
PPPs are governed by federal pension rules, which are more flexible and permissible than those governing RRSPs, so a plan member would be able to, for example, use pension money to make an acquisition in a private company if he or she were looking to diversify holdings.
PPPs are similar to Individual Pension Plans in some ways, but many see these as offering extra advantages given that they’re meant to be a private sector version of some of the biggest public sector defined pension plans out there.
“You’d get a lot of these advantages in a normal government plan or company plan, but you don’t get to control it, because the company controls it,” said Laporte, who has for years highlighted the need for an expanded Canada Pension Plan.
“Here it’s really designed for the owner of the business. Not only do you have all the tax advantages, you also get to tell the investment adviser how you want your money to be invested.”
Contributions to a personal pension plan can exceed those allowed under RRSP limits, which can help you save more for retirement and also compound tax-deferred income.
They give you more deductions than a regular RRSP, with options like being able to buy back past service and claim an additional tax contribution, or deducting all investment management fees.
The fees you’d pay a financial advisor to manage a PPP would be the same as you paid them to manage an RRSP. In Canada, Integris would also claim an administration fee, which is tax deductible and fixed as a percentage of assets.
While these plans could be an attractive alternative for some, as with all things financial, always make sure you get professional advice before deciding whether any investment options are good for you.