Pension Innovation: How Can Entrepreneurs Level the Playing Field With Their Counterparts in the Public Sector?
Sep 23, 2015
The Great Recession of 2008 had many consequences, but in the world of pensions, it truly highlighted the chasm separating the private sector from public sector retirement plans. The "Great Divide" boils down to this: civil servants have back-stopped, defined benefit plans that will provide a comfortable level of pension benefits in retirement, whereas the taxpayers responsible to fund such great plans are largely relegated to RRSPs with much lower contribution limits and a limited ability to weather financially volatile markets.
For most, this state of affairs is immutable and lamentable. For those who have made pension innovation their passion or profession, there are many solutions. The difficulty resides in making them accessible (and intelligible) to the majority, who happens to be "the market".
What then are some of these solutions that put the private and public sectors on an even keel?
Borrowed from the world of accounting, one strategy advocated over the past few years is to use the corporation as a pension fund and to only take in ‘income’ and pay tax thereupon, when a dividend is declared. This combined with different classes of shares given to children and the use of corporate-class securities offers a great way to defer tax and to control the amount of tax paid in retirement.
Borrowed from the world of insurance, one poorly-known solution is the use of an insured retirement plan ("IRP"). Here, one variant is to have the corporation take out life insurance via a universal life policy on the life of the plan member, with the corporation itself named as the death beneficiary. Additional premiums can be made to this policy (that exceed the cost of insurance for the death benefit) and invested in an account within the policy that is not subjected to Part I tax (only a small insurance tax). Since the investment account can be posted as collateral with a lender, the business owner can borrow against the policy, and since receipt of monies from a line of credit is not considered “income", in effect a tax-free pension plan has been set up with the added bonus of providing a largely tax-free transfer of the death benefit to the children/shareholders of the company.
Borrowed from the world of pensions is the Personal Pension Plan (“PPP”), a combination registered pension plan for a single entrepreneur/professional. The PPP is funded by the company, much like the IRP, but the contributions trigger tax-deductions, similar to what occurs with an RRSP, except that the annual level of contributions exceeds RRSP limits and that a series of additional tax deductions are also available, such as:
A) Corporate contribution to assist the member in purchasing years of past service to increase the promised pension in retirement
B) Terminal funding to allow the member to enhance the basic pension with ‘ancillary’ benefits such as indexing, CPP temporary bridge pension, and early unreduced pension benefits.
C) Fees (investment management and administration) are fully tax-deductible, including any RRSPs transferred into the PPP's unlocked account.
D) Special Payments, where the assets of the pension fund do not meet the prescribed rate of growth (7.5%)
E) Interest paid to a lender to make contributions to the pension plan – also tax-deductible.
Thus, it is quite easy to see that with the right combination of solutions, a private sector actor can build a formidable retirement nest-egg that is as generous as a public sector pension but with additional bells and whistles.
The challenge remains, how does one convey this message in under 140 characters?
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