Wednesday, April 24, 2024

LOUISE FAIRSAVE: Replanning your retirement

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CURRENTLY AND IN the years ahead, it will be even more difficult to fully retire say, between the ages of 50 and 60. This article explains some of the changes and obstacles to early retirement.

First, let us consider how National Insurance Scheme (NIS) pensions will be reduced: for every month that a person eligible for an NIS pension retires before the NIS pensionable age, the pension to which they will be entitled will be reduced by 0.5 per cent. So for each year of early retirement, there will be a six per cent (12 months X 0.5 per cent = six per cent) reduction. Compounding this is that the NIS pensionable age for most current workers is now 66.5 years or 67 years. Further pension reform could see this NIS pensionable age moving to 70 years.

Thus, say you retire at 60 years old and your NIS pensionable age is 67, then your normal NIS pension will be reduced by 42 per cent (seven years X 12 months X 0.5 per cent). You would be even worse off the earlier you retire. If you are highly dependent on your NIS pension, visions of an early retirement start to perish.

To be eligible for an NIS pension, you must be fully retired (not gainfully employed). If you are earning work or talent income of more than $1 100 per year, your entitlement to an NIS pension will be at the discretion of the NIS authorities. So, the idea of accepting a reduced NIS pension and supplementing it with part-time work is likely not to work.

In the past, tax incentives for saving towards retirement were a very important extra aid to saving for retirement. You were allowed to save up a maximum prescribed amount in a registered retirement savings plan, RRSP, or a registered deferred annuity, RDA, free of income tax. At retirement age of 60 or over, these funds could then be converted to an annuity (approved for tax purposes) which would be taxed as the cash is received. In this way, workers were allowed to save and invest tax-free towards their retirement and access the funds during retirement, when it was expected that the overall tax rate on the funds would likely be lower.

Similarly, voluntary contributions were allowed to be made to an existing corporate pension scheme free of taxes up to a prescribed limit. At retirement, the accumulated voluntary pension fund within the corporate pension fund was treated separately: it could have been invested in Government paper (bonds or debentures) for a minimum of five years to become available free of taxes. Alternately, it could have been received in part or in full as cash subject to the applicable income tax.

Changes in the tax system do not now allow retirement funds to be saved and invested in an RRSP, RDA or as voluntary contribution to a corporate pension scheme free of tax. This is an important change to note. Funds saved under the old system would have been saved tax-free with the expectation of paying taxes when the funds are withdrawn at a later date. If funds are added to an existing RRSP, or RDA under the new tax system, these new funds are being added after tax. The likelihood is that such an accumulated fund, when withdrawn, will incur double taxation on those funds where were contributed after tax. Similarly, current voluntary contributions to a corporate pension plan stand to attract double taxation when withdrawn.

This points to the need to start a separate personal pension plan where the understanding and expectation of the applicable taxes is clear, and the need to avoid accumulating funds that may be doubly taxed. It will definitely reduce the size of the pension fund that would otherwise been built up over the years, yet you will eliminate the double taxation-reducing effect on your ultimate retirement payout. 

• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. Email: LouiseFairsave@nationnews.com.

This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.

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