There are 3.5 million entrepreneurs in Canada, and a quarter of Canadians are interested in running their own business, so it’s safe to say that the spirit of entrepreneurship is alive and well in the country. It can be a scary to go from being an employee to a business owner though, especially since there are so many unknowns.
In addition to worrying about a lack of stable income, you also need to think about saving for retirement. The good news is, there’s the individual pension plan available.
What is an individual pension plan? Read on to find out.
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What Is an Individual Pension Plan?
An individual pension plan (IPP) is a type of retirement savings vehicle available to incorporated business owners and professionals. The Incorporated business or professional corporation establishes an IPP on behalf of the plan holder, who’s usually the owner or an employee of the corporation.
Contributions to an IPP are made by the corporation. The funds are then invested, typically in a diversified portfolio. The goal is to grow the funds over time to provide retirement income.
Once the plan holder retires, they can start receiving income from the IPP. It’s typically in the form of regular pension payments, which are subject to income tax at the individual level.
Advantages of Individual Pension Plans
One of the best individual pension plan benefits is higher contribution limits compared to registered retirement savings plans (RRSPs). This can be particularly advantageous for people with higher income levels who want to maximize their retirement savings.
In addition, IPPs are structured as defined benefit pension plans. This means that retirement benefits are predetermined based on factors such as years of service and salary history, so you’ll get certainty for your future.
Disadvantages of Individual Pension Plans
While IPPs may sound great, they have their drawbacks.
In particular, they can be administratively complex and expensive. They need ongoing oversight and compliance with regulatory requirements, which can cost you extra money and energy. On top of that, if you don’t follow the strict regulatory requirements, consequences include penalties and potential loss of tax benefits.
Also, IPPs have limited flexibility compared to other pension plans and options. Contributions and withdrawals are subject to regulatory restrictions, and the structure of the plan may not accommodate changes in financial circumstances or investment objectives.
Lastly, funds held within an IPP are generally locked in until retirement. As the plan holder, you’ll have limited access to your savings before reaching retirement age.
Start Saving for Your Future
Now you know the answer to the question, “What is an individual pension plan?” If you live in Canada and are a business owner, then IPPs are a potential route to explore.
Before going for it though, carefully consider your financial situation and retirement goals. You should think about the potential benefits and drawbacks too. If you’re unsure of your pension choice, it’s always a good idea to consult with a financial advisor or tax professional.
Find out more about business products and services by checking out the rest of our blog page.
Alicia Adamczyk is a New York City-based senior writer at Zobuz, covering money and careers. Prior to her role at Zobuz, Alicia worked as a senior money reporter at CNBC, and she held reporting roles at British Magazine and Lifehacker. She is a graduate of the University of Michigan.
