Time to check your pension
It is annual year-end pension review time again. The Bermuda National Pension Scheme 2012 fourth quarter / annual summary reports should have been received by all enrolled pension participants.
This mandatory pension scheme (for the majority of able-bodied employees working in Bermuda) was formed in anticipation of the growing percentage of seniors (I hate that word, you dont hear anyone calling young people juniors) retiring in Bermuda.
The powers that were, at the time of initial legislation, understood only too well that the Bermudas old age contributory pension would not be adequate for anyones monthly living expense, net of purchasing power inflation. I surmise they also realised that the individual savings rates in Bermuda were no better than the low averages of other neighbouring countries.
No matter when you started investing with this new pension scheme, it is time to take the annual look at your pension statement for the following:
— where you were
— where you are now
— where you would like to be
— whether you should make some changes in your allocations, such as increasing your voluntary savings, reallocate your asset sectors and risk tolerance, say from aggressive to balanced, or from conservative to growth
Start by reviewing your statement. This chore will not be easy, particularly if you are finally getting around to tracking several years worth of statements.
How could anyone ignore his or her pension? Youd be surprised at how easy it is to delay dealing with all things financial. The years keep rolling on, suddenly, time to think about a new job, or a retirement location, or other personal issues. It is then that many of us rise up out of oblivion with the realisation that our pension represents a rather large portion of our assets.
So, start! There are some basic, very important items relevant to your pension that can adversely affect you.
Make a note of them and establish a checklist going forward every year. Decide now to spend one night a week on all those prior reports, not only will you be current, but you will certainly have a better idea of where you are. Ready, set, go.
1. Are all your yearly contributions from your employer (and yourself) verified on your pension statement?
Today, this should represent a five percent contribution match from both sides, you and your employer, for a total of ten percent. As an example, if your salary is 50,000 annually, generally, you should see a total of 5,000 added to your pension account for the year. Compute your personal pension contributions for and if the total annual amount contributed does not match your informal calculations, investigate now! Give this discrepancy priority basis.
The reasons that the report stated numbers may not match your basic calculations could be attributed to various issues: interrupted employment, tracking errors, suspension of private pension contributions for a year under the National Pension Scheme (Occupational Pensions) Temporary Amendment Act 2012, or in the worst case scenario, your employer has not made the required deposits to your account.
If youve neglected to review prior years pension statements, this will be a bit more of a chore, but you must make confirming your contribution record a habit. It could be your hard earned money disappearing.
2. If you are making additional voluntary contributions, does that number also affect the appropriate savings pattern (deducted from your wages) for the year?
3. Is your investment asset allocation the same one that you chose originally? Did you find yourself moving investment allocations every time you felt uncertain about market volatility?
4. Do you understand the underlying make-up of these allocations? This may seem like a very simple question, but I am continually amazed at casual remarks that they dont really know what they picked, or I just throw it in the get-to-later pile.
5. Have your been comfortable with the pension investment managers performance in rate of returns achieved? If not, why not? Were you second-guessing yourself, by choosing investments that are more aggressive than you can comfortably tolerate? We will discuss more about investor emotions and hindsight bias in Part II of your annual pension review.
6. What is your rate of return for the year? Different pension manager statements report performance differently. Reviewing your statement more than once a year will help you familiarise and feel comfortable with your pension-reporting format.
Note whether your pension performance return is reported, net of all expenses (NAV), or gross of fees. You cannot adequately compare the performance return (net of all fees) on one pension against another that reports performance gross (meaning no fees deducted). This is an important difference, if, given that both pensions are equally allocated, the gross (fees not deducted) pension funds will show considerably higher results over the net of fees pension return
7. Tidying up the paperwork. Do you know whom you designated as beneficiary on your account? Have you divorced, married, become a widow(er) or have considerably older children now? If you pass unexpectedly, without designating your beneficiary of choice, your pension assets will be transferred by matter of law to the last individual listed on the account at the time of your death. Nothing can change that contract!
Take charge of your finances. What is the point of working if you dont even know what you own? Part II and III to follow.
Martha Harris Myron CPA PFS CFP TEP is an international financial columnist and a cross border financial planning and tax specialist. Member of the American Citizens Abroad Professional Tax Advisory Council. www.americansabroad.org firstname.lastname@example.org
The opinions expressed in this article are those of the author alone, and not The Royal Gazette. This article is intended for general educational purposes only and cannot be used for specific individual tax, investment, or retirement advice, nor can this article be relied upon for any personal financial planning purposes.