If you're a business owner, your conception of the ideal stream of retirement income may be the kind of defined-benefit pension plan enjoyed by public-sector workers and politicians.
That's what Schulich School of Business finance professor Moshe Milevsky and certified financial planner Alexandra Macqueen call a "real pension" in their 2015 book Pensionize Your Nest Egg. A real pension generates a guaranteed income for as long as you live. By comparison the market-sensitive retirement vehicles the rest of us often must use – notably registered retirement savings plans or defined contribution pensions – come up a bit short.
But on the pension front, business owners do have a viable alternative to RRSPs, which are being rediscovered: a 26-year-old pension vehicle called the Individual Pension Plan (IPP) and a newer variant called the Personal Pension Plan (PPP), launched in 2013.
According to pension lawyer Jean-Pierre Laporte – whose Toronto-based firm Integris Pension Management Corp. champions the PPP – roughly 1.2 million Canadians (mostly business owners and professionals with corporations) could be saving for retirement by using PPPs to "mimic" the gold-plated DB pensions. Even so, he says less than 2 per cent (between 15,000 and 20,000) have so far taken advantage of these rules in the quarter century they've been on the books.
Trevor Parry, who with two partners recently established Toronto-based Pension Accuity Partners, said that since the federal budget came down, he has noticed renewed interest from accountants and their clients in IPPs and the PPP, the latter a modified hybrid version of older IPPs that go back to 1991. Mr. Parry says the Liberal government seems intent on trying to get business owners to generate more "T4" income (salary paid to you from your company, for example) that is highly taxed, and doing what it can to discourage the use of dividends and family income splitting, which are currently less highly taxed.
As a result, pension solutions such as the IPP and PPP "are back on the radar," he says. If Ottawa does follow up and get more punitive about the rules on personal service corporations, the IPP will be a "good offset" while government will love the IPP/PPP since they will be able to tax it as income once the business owner retires, he says. Mr. Parry believes there's "a bright future" for these types of pension plans.
The PPP builds on the older IPP. Both offer a true DB-type of pension solution to an individual or small group (such as spouses or a family), giving these business owners and professional corporations the means to save in a tax-efficient manner for their future retirement. Both the IPP and the PPP provide significantly more tax-sheltered investment room than do traditional RRSPs, plus the promise of a guaranteed lifetime payment that is patterned on traditional DB pensions.
In a 2015 paper for the Conference for Advanced Life Underwriting, Mr. Laporte, along with Ms. Macqueen and Mr. Parry, list several advantages that apply only to true pension plans, including forced savings, creditor-proofing and pension income-splitting; they also note drawbacks such as complexity, CRA approval, annual filings and actuarial valuations every three years.
The newer PPP, according to Mr. Laporte, is "a type of registered pension plan that offers both DB and defined contribution [DC] accumulation methods under a single roof, with the freedom to select between the two each year." For owners of professional corporations, this hybrid nature of the PPP aligns the interests of shareholders and pension plan members (usually the same persons).
In years of market underperformance the requirement that extra tax-deductible contributions (special payments) be made, is simply a transfer of wealth from the owner's taxable corporate pocket to his/her tax-deferred personal pension pocket, Mr. Laporte says. Likewise, strong market performance can lead to a "contribution holiday" for the professional corporation and an even safer retirement pension for the shareholder/member.
Apart from flexibility, Mr. Laporte says total savings generated by the PPP are amplified by their being able to exceed RRSP limits at all ages, with superior creditor protection and the ability to invest in asset classes (such as private equity and real estate) that aren't RRSP-eligible but routinely accessed by sophisticated large public-sector pension plans.
Stephen Cheng, managing director for Vancouver-based Westcoast Actuaries, says IPPs share the same advantages as PPPs, and both offer significant advantages over RRSPs: higher pension contribution room than RRSPs, and additional company contributions for past service pension benefits; in addition, portfolio investment management fees and other expenses are tax-deductible for the company and have creditor-protection against corporate or personal creditors.
So if you're a business owner succumbing to public-sector "pension envy," don't despair. Even if you're now in your 60s, it's not too late to get the kind of gold-plated, bullet-proof pension – albeit a scaled-down version commensurate with the reduced years of contributions – that most of the public sector enjoy.
Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at jonathan@findependencehub.com