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The financial risks in retirement are numerous and primarily include longevity, inflation and sequence of returns.
· Longevity risk is the risk where you live longer than your expectation resulting in greater retirement income needs.
· Inflation risk is the risk that future purchasing power will deteriorate quicker than you expect and as a result, your assets are able to afford less.
· Sequence of returns risk is where the order and timing of poor investments can impact how long assets last as they are decumulated.
An Individual Pension Plan mitigates all of these risks as upon retirement, the sponsoring employer can either:
Purchase an annuity directly from any licensed insurance company in Canada which will in turn provide guaranteed retirement income for life consistent with the benefit terms of the IPP (maximum allowable under the income tax act). The purchase of the annuity will be made from the retirement trust. If there are not enough assets in the trust to fund the annuity purchase the plan sponsor can contribute additional pre-tax corporate dollars for the purchase, which is known as terminal funding.
Alternatively, the employer can continue the IPP (sponsoring company must remain active), and pay retirement benefits from the trust. Future actuarial valuations will inform if future pre-tax contributions are necessary to fund the promised retirement benefits.
If you'd like to learn more about IPPs or begin your own, request a free consultation with us today.
