The Personal Pension Plan (PPP) flies under the radar, so what is it exactly?
Despite its low profile in financial circles, the Personal Pension Plan (PPP) offers substantial tax advantages and opens doors to diverse investment opportunities for high-net-worth families, according to an article by the Canadian Family Offices.
Officially introduced and registered with the Canada Revenue Agency in 2011, the PPP stands as a wealth accumulation and tax-saving solution primarily designed for business owners aiming to foster retirement savings in the most tax-efficient manner.
Unlike its more popular counterpart, the Individual Pension Plan (IPP), which receives promotions from banks and insurers, the PPP is “typically not as well-known”, said Kevin Tran, managing director of wealth planning at Our Family Office in Toronto.
Consequently, many high-net-worth individuals may overlook substantial tax savings opportunities, according to Jean-Pierre Laporte, CEO of Integris Pension Management Corp. in Toronto, creator of the PPP.
“The growth has been more word-of-mouth,” Laporte said.
In contrast to the IPP, which offers only a defined-benefit pension option, the PPP combines defined benefit (DB) and defined contribution (DC) pension plans, allowing for additional voluntary contributions and investments in non-traditional asset classes.
All capital gains within a PPP are also tax-sheltered, rendering it an “ideal” vehicle for estate planning and a perfect fit for high-net-worth family businesses, said Laporte.
Clients who have established PPPs have reported saving over $800,000 for retirement compared to traditional RRSPs, according to Laporte's website.
“It’s powerful for intergenerational wealth transfer,” he said, suggesting that family offices should include it in their retirement offerings.
Benefits of the PPP
One of the key benefits of the PPP, particularly for family businesses, is the tax savings it offers while allowing wealth transfer.
Under the PPP, pension assets are pooled within a communal DB account, accounting for past service, explained 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 said.
This results in a substantially larger capital pool available in retirement.
The PPP also stands out for its tax protection, Laporte continued. In the event of the passing of business owners and their spouses, the communal DB account's millions of dollars do not incur probate taxes.
“Millions of dollars can be saved on taxes, and the kids have access to that capital for their own retirement,” he said. “So you win twice.”
Additionally, financial advisors in charge of overseeing the pension maintain their assets under management, avoiding a significant loss upon the business owners' death.
“Their own revenue is much better,” Laporte said.
While many retirement vehicles offer limited investment choices, the PPP provides more flexibility. It allows investments in non-traditional asset classes that offer exposure distinct from equities, unavailable through RRSPs, said Tran.
A PPP can invest in raw farmland, private real estate, or limited partnership units, said Laporte. These diversified strategies can potentially boost returns while mitigating risk and volatility.
Moreover, the PPP allows for the purchase of a permanent life insurance policy, treated akin to a dividend-paying stock that generates tax-free income, further promoting wealth accumulation.
The drawbacks
Despite its merits, PPPs come with certain drawbacks.
“There is more paperwork, especially in the first year just to get registered,” Laporte said.
Additionally, not everyone possesses the expertise to manage a PPP, said Tran. “The product is quite niche, and you will need to find a specialty consultant to help you set one up,” he said.
PPPs are also more complex than IPPs, partly due to limited support from Canadian financial software firms. Moreover, PPPs might appear restrictive for those requiring access to large sums of cash, although Laporte disputed this claim in several provinces.
“In many provinces, including Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island, this is legally untrue,” he said. “And that money can be withdrawn at any time.”
When it comes to fees, the tax savings made possible by PPPs often outweigh any charged fees, according to Laporte.
“[PPPs have] better investment abilities, you have the ability to tax-shelter and pass more wealth to the next generation, and it auto-finances itself,” he said. “And for the financial advisor, they’re not losing half of their money.”
