Personal pension plans: What they mean for Canadian business owners

The personal pension plan is an amazing opportunity for Canadian entrepreneurs to plan for retirment. As I’ve touched on in past articles, small business owners are starting to make up more and more of our economy. In Vancouver and the lower mainland this is especially true – in British Columbia, small businesses contribute to 33% of the province’s GDP, more than any other province in Canada. We are seeing many more entrepreneurs entering the economy and succeeding.

While this is great news for our province and its people, it does have some implications for financial planning. Traditional long-term financial strategies are simply not available to small business owners, and the pension plan is one of them. Today, I’m going to focus on explaining how to design a personal pension plan that fits the profile that small business owners demand.

What is a personal pension plan?

Personal pension plans (PPP for short) are similar to an Individual Pension Plan (IPP), but different in the sense that a Lamborghini is similar to a Honda Accord. PPPs can be set up through many financial advisors where the management and investment decisions are decided within the plan. PPPs were created to provide the private sector with a mini version of the major public sector pensions. PPPs were created by INTEGRIS, who help set up and administer the plans (Note: this is by no means endorsing the INTEGRIS PPP – you should always seek independent, personalized financial advice before making investment decisions).

For many entrepreneurs, personal pension plans may be a far more attractive option than any other savings plan. PPPs allow small business owners to invest tax-deferred income and supplement their CPP and OAS income at retirement. For Canadians looking to maximize their CPP benefit but would like to retire before age 65, this is a great option. It allows entrepreneurs to participate under pension legislation in a flexible manner to help fund their early retirement.

For Canadian small business owners, PPPs offer many advantages. First, they are simple and flexible. They empower small business owners to contribute when they want – unlike like IPPs that demand regular contributions. For SMBs operating in cyclical industries, this is obviously valuable. Personal pension plans give entrepreneurs the ability to save for retirement but avoid the complex pension administration and expensive fees associated with other defined benefit pension plans.

I often hear from business owners managing their own IPPs how complicated it is for them to set up a functional IPP. When you roll in the costs of hiring an actuary and finding an investment manager and custodian to take care of the funds, administering an IPP can be complicated and expensive. A bad combo for busy entrepreneurs who live by their businesses. The use of a Certified Financial Planner that deals in IPPs or even PPPs can help mitigate a lot of this work, though.

How does a personal pension plan create benefits for small business owners?

First of all, PPPs avoid the complexity and cost that IPPs introduce. They are essentially a turnkey pension solution – perfect for small business owners who need to balance managing their savings with growing their businesses. Taking the complexity out gives entrepreneurs more time to run their business and no expensive overhead costs maximize pension contributions and business growth.

PPP contributions are tax deductible, which allows small business owners to maximize the money they can take out of their businesses. In addition to tax-deductible pension contributions, management fees are also tax deductible.

For small business owners, PPPs may have more benefits than a typical RRSP for retirement savings. Comparing PPPs to RRSPs, PPPs have the potential to provide a substantially higher tax deferred savings for your retirement.

PPPs are protected from creditors. While a creditor may be able to raid your RRSP (in small cases) to cover debts, retirement savings posted in your PPP are protected at the highest level. I don’t think I need to explain how that benefits entrepreneurs any further.

PPPs also allow high-earning entrepreneurs to contribute more than RRSPs. While both RRSPs and PPPs allow you to contribute up to 18% of your income, they are capped at different limits. The 2017 RRSP contribution limit was $26,010, while the PPP maximum contribution limit was $43,076 for someone aged 64 making over $145,722 annually. This difference is huge and the benefits for high earners are apparent.

What are the downsides of a personal pension plan?

To start with, PPPs are not free. There are costs to setting up, managing, and having the money managed for you. For smaller or starting level PPPs, the fees on a percentage basis are noticeable. This will, of course, be reduced as you continue to contribute and grow your pension.  For many business owners, the benefits far outweigh the costs.

Personal pension plans, like all other pension plans, are required by Canadian law to freeze a portion of the contributions and interest are set aside to provide money for retirement. For entrepreneurs that highly value liquidity or invest in volatile investments, this may not fit your profile.

Furthermore, pension law in Canada stipulates that individuals cannot invest more than 10% of their pension into a single security. This law is in place to prevent investors from losing their retirement savings and encourage portfolio diversification, but for investors who value control and independence, this may not fit their profile. This law applies to most registered pension plans in Canada.

What’s the verdict on personal pension plans

For Canadian entrepreneurs, personal pension plans level the playing field for small business owners and entrepreneurs. For high-earning entrepreneurs, PPPs can be an attractive option offering a great deal of flexibility and benefits that may rival other retirement savings vehicles.

The rise of PPPs represent exciting innovation and opportunity in the pension space, and can serve as an exciting option for Canadian business owners, from Vancouver to Fort St. John.

Thanks for reading!

If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.

  • Brad Blair, CFP, CIM, FCSI, CHS.