Insurance Understood: Summer smoothies
By Medicine Hat News on July 31, 2018.
My family loves smoothies all the time but the summer seems to the busiest season for making them. We usually have a base fruit but then add some unique healthy ingredients like spinach, chia or flax seeds, hemp hearts, coconut and so on. Even with the same fruit small additions to those unique ingredients really changes the outcome of the smoothie. This got me thinking of insurance solutions and how they can be the unique ingredient added to an investment plan. Today I want to compare an IPP (individual pension plan) to the smoothie and an annuity to the unique ingredient in a smoothie. First of all, we need to understand that an IPP is a one-person defined benefit pension plan which allows a person to accrue retirement income on a tax-deferred basis. Business owners and medical doctors often will consider these types of programs since they are responsible for their own retirement outcome. An IPP is attractive as it allows the person’s business or company to contribute to their retirement at a higher rate than RRSPs and it is a writeoff to that business or company. However, there are some actuarial costs involved to maintaining an IPP while making deposits as well as potentially in retirement. Contributing to an IPP is quite simple while it accumulates. Upon retirement there is a lot of choice in structuring the retirement income benefit. Like a unique smoothie ingredient that you can tweak it to your desire. I strongly advise you to work with a qualified professional team when making your selection. There are very strategic differences from an RSP like potentially being able to roll over the benefit within the company to another person who is not your spouse as is the case within an RSP. At a high level there are three main options for structuring the retirement income. One way is to keep it invested and have a prescribed withdrawal rate (determined by an actuary). There will be regular actuarial fees to assess that the promised benefits are properly funded by the company. If they are not then the company can make contributions and obtain additional writeoffs. Second, is to have it transferred to a LIRA (locked in retirement account). This is basically an RRSP that you are restricted on how much you can access at a time and when you can access it. A caution here is that there is usually a portion of it that becomes taxable in the year of transfer. Third, the company can have an annuity at an insurance company to provide regular monthly income. The unique part of this is that you can tweak the income with features like indexing, creating a guaranteed income period and so forth. It is worth noting that once an annuity is chosen there is no going back. You cannot change it. On the positive side you do not have to pay actuarial fees anymore. There is no one way better than the other. An accountant recently referred to me a medical professional who had set up an IPP and was in the process of making the decision about the income method. Unfortunately, the initial advisor did not explore the many variations of the annuity with the client so they did not have a full view of how it could apply. Luckily with a LIRA or IPP holding investments it can still be transferred into an annuity if that is appropriate. Just like a smoothie, you can create some very unique features within your IPP that use insurance solutions. Steve Meldrum B.Mgt. CFP CLU is the founder of Swell Private Wealth Ltd. For over a decade he has specialized in helping individuals and businesses expand protect and perpetuate their wealth. For further information or tailored advice, contact him at 403-487-0490, steve@swellwealth.com or connect on social media. 17-16
