Monday, April 21, 2014

Rules Governing Individual Pension Plans

By Essie Osborn


The sponsor of any pension plan is guided by certain regulations that define relations with contributors, management structures and funding options. Individual pension plans are only sponsored by incorporated and active companies. It means that the members on whose behalf the company makes the contributions are in their T4 or T4PS income rolls. This excludes outsiders who have no relation with the sponsoring company.

There is a formula that is provided indicating the benefits that each member will get from the scheme. This ensures that those signing into the scheme are aware and can personally calculate their benefits. The formula is found in the documents that a person signs into and will accompany him all the time. There are no hidden charges or fees that are not explained in the documents.

Investment options for each plan are also outlined by the law. The aim is to secure contributions made by members and avoid loss through investment in unstable ventures. The rules should be followed by managers to the letter. Contributors are therefore assured valuable returns by the time they retire. It would be catastrophic to loose money invested by thousands of pensioners. Each plan is vetted and managers informed of these regulations during registration.

Employers can deduct member contributions from corporate income. An actuary sets the amount to be contributed by a sponsor. The actuary performing the calculation must be certified and licensed to practice. This ensures legitimacy of resultant figures. The schemes cover both connected and non-connected members. The non-connected are those who are paid highly by the sponsor.

The responsibility of employers is not to pay into the scheme but to remit money from what employees are entitled. The money remitted does not count as part of the taxable income. This amount is captured in box 52 when returns are being filed. This allows the tax departments to effects adjustments by following the formula that is given in the acts guiding income tax.

The actuary uses a set formula to determine how much will be deducted from the income of members. Other factors to consider include the age of the contributing member. The T4 earning history of each contributor is also used to determine the amount to be paid. The final figure must also factor in a set of actuarial assumptions to take care of unpredictable circumstances and offer cushions from harsh investment climate.

The use of designated plan to describe such a scheme emanates from the fact that membership is restricted to particular individuals. This opens such schemes to maximum funding restrictions. Such a condition implies that the assumptions made by actuaries must follow within the ITR guidelines. With such restrictions, the figure obtained will be fair by considering the investment climate and expected benefits.

There are IPPs that do not fall under the designated plan. Such plans give the actuary the freedom to determine the payment to be made using his own assumptions. Contributors must be aware of the formula used and the implication such a calculation will have on their income. The contributions must be reflected on their income slips.




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