Lump-sum withdrawals: most are prudent

  • Sensible decisions: evidence from the UK suggests that those who are able to make lump-sum withdrawals from their pension funds tend to be prudent

    Sensible decisions: evidence from the UK suggests that those who are able to make lump-sum withdrawals from their pension funds tend to be prudent


The National Pension Scheme (Occupational Pensions) Amendment Act 2019 legislation, which will allow employees to take out a quarter of their private pensions as a lump sum on retirement, was passed by MPs in the House of Assembly on November 15.

The amendment also allows non-Bermudian workers (employees and self-employed) to contribute to this pension. There are issues with this concession, however, that will be discussed in a future article.

Comments in media expressed concerns that “the ability to take a 25 per cent lump sum of the value of an individual’s Bermuda National Pension Scheme at retirement could deprive people of a rainy-day fund later”.

How many Bermuda islanders know that for the last 21 years (since inception of Moneywise financial columns or possibly longer), the Public Service Superannuation pension plan allows civil servants to withdraw 25 per cent of their pension at retirement?

While we don’t have access to any Bermuda data on these concerns, the 25 per cent partial lump sum pension withdrawal that has been allowed for decades in the UK (and the ability to withdraw 100 per cent of their pensions since 2015), indicate that there is little “squandering pension proceeds”.

Lump sums have been used for major items — to pay off home mortgages, underwrite college educations, vital home repairs — while the majority of UK pensioners were found to be practising the same prudence they’ve always espoused, withdrawing only minimum amounts needed.

This amendment was long overdue. It is more than high time that Bermuda’s private workforce have financial equality with their public service peers in their pension decisions.

Rampant confusion and misunderstanding still exists over the various Bermuda pensions and the terms that apply, as expressed directly to Moneywise over the years and in online social media commentary.

Basically, there are three large scale workplace pensions mandated in the Bermuda workplace.

1. The Bermuda Government Contributory Pension Fund (CPF), otherwise known as Social Insurance

2. The Bermuda National Pension Scheme (Occupational Pensions) Act 1998 (BNPS), a universal defined contribution plan designed specifically for private sector Bermuda islanders and their spouses

3. Public Service Superannuation Act 1981 (PSS) and an offshoot for Members of Parliament, a defined benefit plan

Note this is an overview of the plans. Future Articles will feature an in-depth analysis of each of these very important Acts.

The CPF — Government Social Insurance Office

Contributions from you and your employer, $35.92 each weekly, are paid directly by your employer to Government.

You are entitled to receive your contributory pension if you:

• Are 65 years of age or over and

• Have paid (or been credited with) between 25 and 50 contributions to the Contributory Pension Fund (CPF) a year

• The monthly pension amount will depend on your number of working years and total contributions to the plan

• You may qualify whether you stop working or not, at age 65, currently

• There is no 25 per cent lump sum offered.

However, for work permit holders, other expats, and those Bermuda islanders not qualifying for the contributory pension, your total contributions (a lump sum) will be returned to you upon application at age 65 without any interest to you.

Most recent actuarial (not audited) report listed on the government social insurance website is dated August 1, 2014. Pages 50-52 are illuminating to income, pensions paid out, demographics, and investment returns. CFP monies are professionally managed but by whom, what detailed portfolio allocations, where, and how, is not stated.

The BNPS — the Bermuda Pension Commission and your plan administrator

Vesting — immediate at employment with funds locked after one year.

Contributions during your employment life are made by you and your employer (currently at 5 per cent of your gross salary, monthly — including some non-cash benefits) directly to your pension plan company administrator who hires professional investment managers to invest your portfolio, based upon your risk profile and investment allocation choice, for example conservative.

During the life of your pension, a hardship premature withdrawal application may be made with Pension Commission approval.

At your planned retirement age (55-60-65), the market value of your account is what you see is what you get.

You will have a choice of:

• A 25 per cent withdrawal of your lump sum, converting remainder to either an annuity (with various term choices) or a drawdown account

• Converting to an annuity (with various term choices)

• Converting to a drawdown account

• Smaller pension sums can be withdrawn in a lump sum, now increased to approximately $50,000

The PSS — a defined benefit plan

Vesting — eight years in public service with the Government, service requirements differ for police, prison, fire officers and Bermuda Regiment staff.

Vesting for MPs — believed to be five years.

Public servants do contribute to their retirement superannuation plan, but their actual pension amount is dependent upon Government determination of a mathematical calculation based upon

• Number of years of service

• Whether that service was broken (interrupted), and

• At the rate of one eight-hundredth of the salary payable to him immediately preceding the date of his retirement for each complete month of pensionable service, section 33 of the Act

• Pension amount shall not exceed 60 per cent of highest salary paid, section 23 of the Act

• Financial hardship application is available, section 40a of the Act

• Retirement may be at 55, 60, or 68 depending upon category of civil servant

• A 25 per cent lump sum withdrawal may be taken, lesser percentage amounts (10 per cent, 15 per cent, 20 per cent) are also available

• Remainder pension is paid monthly for life

Dear readers, information provided is as current as my research made possible. Please, please send me any updates, terms of conditions that I might have missed.

References

Consolidated Laws can be found at Bermuda Laws Online http://www.bermudalaws.bm/SitePages/Home.aspx

Contributory Pensions Act 1970

National Pension Scheme (Occupational Pensions) Act 1998

Public Service Superannuation Act 1981

Pension freedoms: withdrawal figures ease fears of ‘Lamborghini’ pensioners wasting savings, Ed Monk, August 17, 2016, The Telegraph, https://tinyurl.com/synzhdz

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Contact: martha.myron@gmail.com

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Published Nov 30, 2019 at 8:00 am (Updated Nov 29, 2019 at 6:50 pm)

Lump-sum withdrawals: most are prudent

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