THE MAJORITY OF Barbadian workers do not have a work-related pension plan. It is estimated than over 70 per cent of all workers do not have access to a company pension plan.
Much has been written and explained about work-related pension plans which service the minority of workers. Today, we look at the retirement planning necessary for the majority of workers.
There is no legal requirement that an employer must have a pension plan. However, when an employer is in a position to offer this benefit, it can make a significant difference in attracting the best talent for the job.
Yet, the ultimate responsibility for providing funds for the period of full retirement always remains fully on the employee’s shoulders. This is a fact that every employee should underscore. Accepting this reality, whether the employee has access to a company plan or not, would force all employees to always carefully analyse their retirement funding and the expected benefit more closely throughout their careers.
Without a work-related pension plan, and without making personal provisions for when they fully retire, employees will tend to be overly dependent on the National Insurance Scheme (NIS). This will likely not be enough to maintain a comparable lifestyle to that of their working years.
The first drawback is that the NIS has a maximum insurable level for pay. So, to the extent that you earn more than that level, the NIS will only be providing retirement income in line with that limit. Then, even if during your work life you are fully insured because you have always been at or below that limit, for every month that you retire early compared to the reformed pensionable age, 0.5 per cent will be deducted from your retirement income entitlement.
Under pension reform, if you were born between January 1, 1947 and June 30, 1951, your normal retirement age was increased to 66 and a half years old. If you were born July 1, 1951 or after, your normal retirement age was increased to 67. So, for example, if you were born in October 1949 and wanted to retire at say, around your 63rd birthday, you would have lost (42 months x 0.5) = 21 per cent of what would have been your normal retirement. This virtually makes an early retirement at 55 or 60 years old untenable unless there is significant supplemental income.
On the other hand, you can continue working up until age 70 in order to further enhance your NIS pension benefit. So, who would like to do that? What time may be left to really enjoy your golden years?
Then, in the past, NIS pension benefits were calculated on an old basis which was 55 per cent of your final three-year average insurable earnings. Gradually, NIS pension benefits are moving to be calculated on a new basis, namely: 60 per cent of your final five-year average insurable earnings. So, again, your retirement income will also be dependent on that final five-year average.
So, NIS pension, even at its fullest possible amount, may not be adequate to maintain the standard of living of the working years. This points directly to the need to establish supplement income for your retirement years. Even as a member of a work-related pension plan, where your company is offering a defined contribution plan rather than a defined pension plan, the risk of reaching retirement age without adequate funds is heightened.
The most formidable tactic to address possible shortfalls in providing for your retirement is to become more and more knowledgeable about saving and investing. You need to develop your investing muscles. Every investment may not provide great returns, but hopefully the more you experiment, the better will be your assessment.
The earlier in your career that you accept the responsibility for providing for your retirement, the better it will be for you. It makes more sense to experiment with greater risks during the youthful part of your career. If the risk you take works against you, there will still be time to recover. Hopefully, you would have honed your investment muscle by experimenting.
• 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.