The IPP is a defined benefit pension plan that is registered with the Canada Revenue Agency and the provincial authority. Defined benefit means that the ultimate pension amount is defined in advance and the pension amount is based on a percentage of salary.
An employer will establish an IPP for senior management in order to increase employer contributions to a higher level than RRSP maximums. Each plan is custom-designed and takes into account each participant’s personal situation. The contributions required to finance the plan vary from person to person, based on factors such as age and income. The annual contribution amount is established by an actuary.
An IPP usually allows for higher contributions than the RRSP, hence the possibility to save more for retirement. Since the plan is registered, all contributions grow on a tax-deferred basis.
The IPP is entirely funded by the employer and all contributions and plan costs are tax-deductible. The employee makes no contribution.
Under certain conditions, lump-sum contributions can be made for years of service prior to the effective date of the plan. This past service funding can help to maximize the retirement benefits and results in additional tax-deferred growth.