cisi

Article 4, in the series: Retirement Planning from a Barbadian Perspective

My circumstance

I had decided two years ago to invest 4% of my salary towards retirement. I was uncertain whether to invest in a personal pension or a mutual fund. My current employer did not offer an employment pension plan. I ended up signing up a registered private pension plan to transfer my prior employment pension. Then I started contributing 4% of my salary to a mutual fund. 

My decision was based on a discussion I had with a financial professional. His reasoning at that time, was there are no tax incentives on pension contributions. The money I am using to pay to my retirement is already net of income tax.  Pension income is taxable income and If over $45,000, will incur 28.5% taxes. Essentially paying taxes twice. Where as, investing in a mutual fund, will incur a 15% withholding tax on the earning from the fund. Withholding tax is not charged on contributions.   

Financial Planning for Retirement

When planning for retirement you need to think about what lifestyle you wish to live. How much you need to save, where to invest and when to invest. Also taking into consideration:

• Return on investment.
• Administration costs.
• The financial strength of the investment options.
• The investment strategy of each fund and the associated investment risk. 
• Your investment timeline.
• Tax implications.
• Affordability.

Prior performance is not a predictor of future performance. You can use historical data to compare the performance of different funds over time.

Personal Pension

Your future pension income is based on your contributions, the funds’ investment performance and the funds administrative fees.  You pay the contributions, bear the investment risk, and do not have a guaranteed pension income for life.  You can pass on any remaining value in your personal pension to your beneficiary.

State Pension

The NISSS Old Age Pension is for life. There is no inheritance to pass on, with ‘unused’ contributions remaining in the fund.  The current pensionable age is 67 and over the coming years, it is highly likely that pensionable age will increase.  The government can adjust the pensionable age as well as the calculation of benefits as it develops its national policy. 

The outflow of the NISSS in terms of expenses and disbursement of benefits, is greater than its inflow of contributions. Projections are that this trend will continue into the future.

Employment Pension

Employment pension plans come in two main types: defined benefit plans and defined contribution plans.

Defined Benefit Pension Plan

Defined benefit pensions offers employees a guaranteed percentage of their salary on retirement for life. The employer holds the risk of ensuring that the pension fund meets its membership commitments.  Retirement age is often 65 with the opportunity to retire early – ages 55 to 60. The plan can offer inheritance benefits, depending on its design.

Defined Contribution Pension Plan

Many businesses have migrated to defined contribution pension plans, set up and administered by financial institutions. With this type of pension, the employer has no liability to guarantee its employees a pension for life.   In all other respects, it resembles the personal pension plan described above, with the employer contributing directly to the fund.

Employer contributions to employment pension plans vest after a required period of continuous employment. This means that when vested, the employee keep all contributions in their plan.

Mutual Funds

There are several mutual funds in Barbados, that are available to invest in.  Each fund has a predetermined value to open an account, with many starting as low as $100.   Mutual funds are not for short-term investing or speculating. You can access your mutual funds, within the agreed terms set by the fund.

Conclusion

Income tax incentives and awareness is need to encourage Barbadians to invest more for their retirement. Barbados’s state pension is under press. It’s workforce is aging with less younger people entering the workforce.

There is also disparity between private sector and public sector employment contracts. Private sector employment contracts end at age 65, while government contracts have been adjusted in line with the pensionable age. Consideration is needed to bring private and public employment contracts into alignment. To achieve this will take legislation and tax incentives.

Other article in this series:

If you would like to read earlier articles from this series, please clink on the links below:

Article 1: Retirement Planning and the Barbados National Insurance Pension

Article 2: Challenges facing Barbados’s state pension scheme

Article 3: State pension and the impact of change

Author: Graham Greenidge is a Chartered Member of the Chartered Institute for Securities and Investment (CISI) and is also a Fellow Member and Chartered Marketer with the Chartered Institute of Marketing (CIM), UK.