In his ongoing mission to turn the average Barbados revenue Authority tax collector into the local equivalent of the Solitaire-playing Maytag repairman (“the loneliest guy in town”), Finance Minister Chris Sinckler announced several measures in his June Budget Speech which were “expected to result in a reduction of 60 per cent of the total tax refunds processed by the Barbados Revenue Department,” according to Ernst & Young (Focus On Barbados Budget 2015, page 4).
At the personal income tax level, one of these is removing the BDS$10 000 tax deduction for planning and saving for the future using a registered retirement plan (an RRSP), which E&Y described as “extremely relevant in the context of the depletion of funds in the National Insurance Scheme.” (Ibid., page 4)
But there is a “voice in the wilderness” crying out for a rethink on this measure, and it belongs to none other than Roger Cave.
Fortress Fund Managers Ltd, which Mr Cave helped to found and of which he remains the investment director, helped invent the category of private pension savings here, and it has worked well.
The idea is that if you put in some of your income from a particular year into an RRSP, you can deduct it from your taxable income for that year.
You have to leave it in said RRSP for at least five years if you don’t want to pay that tax retroactively, and of course, the hope is that you would leave it there for many more years, until you need it for retirement. If you have enough in the pot by then, you might never have to take it out, but just live on the interest.
Well, all of that is going to be history now, as it just got abolished. Just like that.
Stay of execution
But Mr Cave is fighting for a stay of execution. He says that the “proposed removal” of personal tax allowances – including those for Registered Retirement Savings Plans (RRSPs) and group pensions – from income tax year 2015 as announced by Minister of Finance Chris Sinckler in his Budget presentation, will likely reverse the gains made over several years in financial planning for retirement. You think?
In a statement last week, Mr Cave said he was urging the Government to reconsider its decision. Instead of eliminating them altogether, he said, the Government could either reduce the allowances or implement a cap on RRSPs and group pension allowances, individually or combined. Sounds like Greek to me.
But I do understand it when he says that pension tax allowances are too important to retirement planning to be removed.
Pension tax allowances facilitate the building of what the World Bank calls the second pillar of a multi-pillar financial system for retirement, said Mr Cave.
Any savings in revenues made by the removal of these allowances, which Mr Cave estimates could be up to $16 million per year, were, he said “likely to be significantly outweighed by the future costs and burden on the state of those contributions not having been put aside for people to cover their living expenses when they retire”.
He called the idea penny-wise and pound-foolish.
In addition, he argued, the removal of the tax deductions for contributions without, at the same time, lowering or removing the taxation of pension benefits would result in “double taxation”. As a result, he warned, people were likely to stop making any further contributions to their RRSPs as “they would be better off in the future by saving and investing outside of taxable regulated pension schemes”.
And he saved the sting of his criticism for the end, calling the measure an “an ill-judged tax policy for pensions,” which he said would “do little” to resolve the national fiscal deficit.
“Do little”? I somehow find myself in complete agreement.