Every working-class citizen is excited about the prospect of retirement. For many who are fortunate enough to reach this milestone, it represents a period of bliss and relaxation after years of dedicated service to the economy. However, our individual experiences in retirement will differ depending on the pension decisions we make while we are employed. It is imperative that we understand what our expected “payout” will be to ensure we have the best retirement experience. To capture this we must understand the types of pensions available and what we can do to maximize our benefits.
First, there are three types of pensions available, they are: state pension, defined-benefit pension and defined-contribution pension. Our National Insurance Scheme (NIS) is the state pension in Barbados. It is a government-run insurance benefit which works by collecting premiums from the current working class to make payments for a variety of claims including pensions to retirees. The maximum received depends on the amount of contributions made to the fund during the individual’s work tenure. Meanwhile, Investopedia describes the other pensions as, “…a defined-benefit plan—also commonly known as a traditional pension plan—provides a specified payment amount in retirement. A defined-contribution plan allows employees and employers (if they choose) to contribute and invest in funds over time to save for retirement.”
To dive further into the National Insurance Scheme, there has been increased scrutiny over the ability of the Scheme to continue paying premiums well into the future. Low birth rates, less self-employed contributors, rising unemployment and economic contractions are among the factors attributed to the current state of the Scheme. Persons can retire at any age, between 60 to 70 years old, with persons retiring before 67 being subject to adjustment rate decrease of 0.5% per month for each year early. While persons opting to retire after 67 have an increase of 0.5% per month for each year late. To estimate the expected pension received, the NIS has provided the below examples on their website:
For persons aged 56 or over – on 31st December 2002, their pension would be calculated using the old basis.
Contribution Weeks 1,100 weeks (22 years)
Annual Average (of the best 5 years) $35,500
Aggregate Earnings (after first 500 contributory weeks) $426,000
Calculations:
Basic annual pension = $35,500 x 40% = $14,200
Supplementary pension= $426,000 x 1% = $4,260
Total Annual Pension= $14,200+ $4,260 = $18,460.
Weekly Pension = $355
For persons under 47 years – at 31st December 2002, their pension would be calculated using the new basis.
Contribution Weeks 1,100 weeks (22 years)
Annual Average (of the best 5 years) $35,500 Calculations: 2% for each year for the first 20 years and 1 ¼% for all subsequent years
(For this example, the subsequent years will be 22 years – 20 years =2 years)
Calculations:
Basic annual pension = 20 x 2% x $35,500 = $14,200
Supplementary pension = 2 x 1 ¼% x $35,500 = $887.50
Total Annual Pension = $14,200.00 + $887.50 = $15,087.50
Weekly Pension = $290.14
For persons aged 47 and over but less than 56 years on 31st December 2002, their pension would be calculated using 50% new and 50% of the old basis.
Weekly Pension calculated using Old-Basis (from Part 1 above) = $355.00
Weekly Pension calculated using New-Basis (from Part 2 above) = $290.14
Calculations: ½% of the “Old-Basis” total + ½% of the “New-Basis” total = ½ of $355.00 + ½ of $290.14 = $177.50 + $145.07
Weekly Pension = $322.57
Despite the obvious perks of the National Insurance Scheme, this should be used as a foundation or the first building block towards an effective retirement portfolio. An additional plan whether it be defined-contribution or defined-benefit would provide an additional level of security with more reliability. To expand on this point, consider again the type of retirement experience you would like, we all want to have the best experience and that will not be accomplished by accepting the bare minimum needed. Furthermore, none of us possess the ability to see into the future and with the current economic conditions, high costs of living and low purchasing power, we must be better equipped to handle life’s eventualities.
In Barbados, most private sector businesses offer pension plans to employees where investment options are decided on by each employee. The progress on the individual’s plan is provided in an annual pension statement and over the life of the plan each person determines how to alter their investment strategy to maximize the benefit received. However, the NIS and the pension program provided by the private business does not represent our final hope. We also have the ability to enter into a Registered Retirement Savings Plan offered by several financial institutions across our island. This plan allows us to choose an investment strategy, determine the tenure of the plan, track the progress and indicate the contribution to be made. At maturity, if an individual decides to take all their cash, three quarters of the cash is subject to a 25% tax while the remaining quarter is tax free. Alternatively, some or all of the proceeds can be transferred into a single premium annuity to defer the taxation levied. With the single premium annuity, there is a single initial lump sum paid in (the pension proceeds) then the individual immediately receives monthly repayments of the purchase price, along with interest during their retirement. This additional income would provide some much needed support during retirement and can relieve the stress and burden associated with simply having one plan.
In closing, let us remember the old adage “proper planning prevents poor performance” and liberate ourselves from the heavy reliance on other institutions to determine what is best for our future. We must make conscious and consistent decisions regarding our retirement plans by proactively exploring our options. We hold the keys to our future; it is about time that we use them to unlock our fullest potential.