Overlooked pension plan can come to the rescue of HNW families
The PPP is not heavily marketed, but it offers dramatic tax savings and the inclusion of non-vanilla investments
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Mention the Personal Pension Plan (PPP) in investment circles and you may get a blank look, even though it can provide dramatic tax savings to high-net-worth families.
Launched and registered with the Canada Revenue Agency in 2011, the PPP is a wealth accumulation and tax savings solution that was created with business owners in mind to grow retirement savings in the most tax-sheltered manner possible.
But it’s the Individual Pension Plan (IPP) that gets more attention in the financial industry. IPP is a different vehicle with fewer bells and whistles. But it’s heavily marketed by banks and insurers, says Kevin Tran, managing director of wealth planning for Our Family Office in Toronto.
“[The PPP] is typically not as well known,” he says.
As a result, wealthier people can miss out on big tax savings, says Jean-Pierre Laporte, chief executive officer of Integris Pension Management Corp. in Toronto, which designed the PPP. And pick-up has been slow. “The growth has been more word-of-mouth,” he concedes.
Unlike an IPP, which offers only a defined-benefit pension option, a PPP is a combination of defined benefit (DB) and defined contribution (DC) pension plans, which also allows additional voluntary contributions. It also can be invested in non-traditional asset classes, and all capital gains are tax-sheltered, making it an ideal vehicle for estate planning — and perfect for high-net-worth family businesses, says Laporte.
According to his website, clients who set up PPPs save $800,000 or more for retirement when compared with traditional RRSPs.
“It’s powerful for intergenerational wealth transfer,” he says, and a tool that family offices should promote among their retirement offerings.
Here are a few benefits and drawbacks of the approach.
PPP maximizes the transfer of wealth
Laporte says that for family businesses, the obvious benefit of a PPP is how much money avoids taxes and becomes part of the wealth transfer.
Under a PPP, in cases where the parents and children work in a family business, pension assets are pooled in a communal DB account, an arrangement that accounts for past service, says Laporte. “But on an annual basis, because the children would be penalized if they contributed using DB rules, they use the DC rules instead, allowing them to contribute more money earlier,” he says. “They use the DC money purchase limit,” he says, which is $31,560 in 2023.
Because the children are allowed to contribute significantly more money each year than they would in an IPP, this creates dramatically more capital available in retirement, says Laporte.
PPP reduces tax upon death
Laporte says that one of the biggest selling points of the PPP is the tax protection it offers. In a situation where a business owner and spouse pass away, the millions of dollars in the communal DB account become pension surplus and are not subject to probate taxes.
“Millions of dollars can be saved on taxes, and the kids have access to that capital for their own retirement,” says Laporte. “So you win twice.”
It’s powerful for intergenerational wealth transfer.
Jean-Pierre Laporte, Integris Pension Management Corp.
At the same time, financial advisors in the family office overseeing the pension have a decided advantage. They do not lose half of their assets under management upon the death of the business owners, says Laporte. “Their own revenue is much better.”
PPP offers a wide range of investment options
With most retirement vehicles, investment options can be fairly limited. Often, they are traditional “vanilla,” such as stocks, bonds, mutual funds and GICs.
Not so with the PPP, says Tran. “It allows for investments into non-traditional asset classes that give you non-equity-like exposure – that are not available to be invested in via an RRSP,” he says.
Because a PPP is a pension plan and not an RRSP, it can be invested in raw farmland, private real estate or units of limited partnerships, says Laporte. These diversification strategies can increase returns while reducing risk and volatility, he says.
When it comes to intergenerational wealth transfer, the PPP also allows the option of buying a permanent life insurance policy, Laporte says. This policy is treated like a dividend-paying stock that will one day pay a large dividend to the pension fund. Such a payment is tax free, as Canadian tax laws do not consider life insurance proceeds taxable as income.
So millions of dollars can be redirected to the PPP, and assets under management can increase significantly and grow tax-free for years to come, says Laporte. This provides the children of the business owner with a much larger pension payout.
Some drawbacks
PPPs, for all their merits, do have downsides. To begin with, they can be labour-intensive to set up, unlike RRSPs, which can be set up in minutes. “There is more paperwork, especially in the first year just to get registered,” says Laporte.
And not everyone has the ability to manage a PPP, Tran says. “The product is quite niche, and you will need to find a specialty consultant to help you set one up.”
PPPs are considered more difficult to understand and administer than IPPs, Tran says. That might be because no financial software firms in Canada offer the option of setting up a PPP. They only recommend TFSAs or RRSPs, says Laporte, who adds that he is in talks with several firms to change that. This results in considerable paperwork.
Tran also feels that for business owners or professionals who need access to large amounts of cash, “the PPP is restrictive in the sense that it locks up these funds to be available during retirement.”
Laporte disagrees. “In many provinces, including Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island, this is legally untrue,” he says. “And that money can be withdrawn at any time.”
He says that the pension legislation does not contain any locking-in requirements if the PPP is set up for a “connected person” under the Income Tax Act. “Most business owners who set up a PPP own at least 10 per cent of the shares of their own businesses, qualifying them as ‘connected persons,’” says Laporte.
As for fees, Laporte says, the vast tax savings that clients can achieve outweigh any fees charged by an advisor. “You’re accessing a whole bunch of tax write-offs that didn’t exist before,” he says.
Family offices should look closely at what PPPs can offer their clients, he says. “It has better investment abilities, you have the ability to tax-shelter and pass more wealth to the next generation, and it auto-finances itself.”
“And for the financial advisor, they’re not losing half of their money.”
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