On December 3, we followed the hypothetical cases of two gentlemen, Mr. John Contribore and Mr. George Benefine, employed in Bermuda in two different sectors of the economy.They are both age 60, both ready to retire, and both have pension plans, but when it is time for each of them to receive distributions from his retirement plan, the similarities end.Generally, there are two types of pension plans offered by Bermuda employers. Mr. Contribore, who works for a Bermuda private employer, has a defined contribution plan. Mr. Benefine is employed in the public domain (government) and has a defined benefit plan.The Bermuda National Pension Scheme (the Plan) legislation (implemented in 2000) emulated defined contribution plans offered in various other countries, but added specific stipulations relative to the Bermuda workplace.The Plan is mandatory for employers and employees (now contributing 5% each) within the legislated parameters. Until recently, no premature distributions from the Plans were allowed (received) to the employee until the age of retirement stipulated in the employer’s plan.Increased redundancies, reduced wages, and shortened work weeks in Bermuda, however, have hurt families’ abilities to meet rent, mortgage, and school commitments.Pension hardship withdrawals have been allowed for individuals meeting cash flow need requirements, on a case-by-case basis.A defined contribution plan, according to Wikipedia, “is a type of retirement plan in which the amount of the employer’s annual contribution is specified.Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account.In defined contribution plans, future benefits fluctuate on the basis of investment earnings.”Mr. Contribore started his Bermuda National Pension Scheme, along with most employees in Bermuda at its inception on January 1, 2000.The Plan launched a tiered gradual approach to the percentage of salary mandated for contributions, working up from 1% (and a 1% employer match) each year to a 5% top cap.He had a small pension from a prior employer pre-2000 that he could add to the mix, along with an additional voluntary contribution if the family budget could handle it.Certainly, he planned to work toward incremental raises to increase the total saved. At the end of year 2011, his annual salary is $80,000Since he originally chose his retirement account investment asset allocation more than ten years ago, he was well aware that his total future benefit could fluctuate based on capital market influence on his investment earnings.He would describe it as an almost “what you see is what you get.” Whether the market had been terrific, or performing under water, the balance is the balance.While he did worry, overall, he felt confident enough to stay with his investment choice of a balanced portfolio, and was fortunate that his overall pension portfolio appreciated in value to an estimated $188,000. *Mr. Contribore now must determine how he wants his pension to be distributed to him.Currently, there are two basic choices for pension distributions: an annuity, or a combination of an annuity, and an investment drawdown account.An annuity is a contract between an insurance company and the pensioner (retiree) that binds the insurance company to provide a guaranteed periodic payment (monthly is the most common selection) to the retiree (often called the annuitant in legalese) when the individual retires.It is important to realise that once the pension accumulation is converted into an annuity, the opportunity for capital market appreciation is gone.The insurance company will offer a current market interest (net of administration fees) rate attached to the retiree’s lump sum, which will remain the same through the term of the payments.An investment “drawdown” account, sometimes called an Income Drawdown Plan, allows the retiree to take income from his/her pension account while the funds remain invested thereby taking advantage of future growth (or losses) as capital markets may dictate.Generally, investment drawdown accounts are only recommended for higher retirement account balances, or where an retiree has other sources of income available.Insurance company annuity providers offer various annuity distributions options ranging from short 5 year term distributions, to other options where the balance of the retirement plan can be left to a spousal beneficiary.All options should be reviewed carefully within the context of one’s overall financial profile.Payout distributions decision time has arrived. Mr. Contribore decides on a pure annuity distribution.He will receive an estimated $750 to $800 per month for the rest of his natural life of 20.92 years.How does his plan shape up against George Benefine’s Defined Benefit Plan? See final article in the New Year on January 14, 2012.Hypothetical scenarios are based upon general regulations and assumptions and cannot be construed as personal individual investment or retirement planning advice.Each individual’s retirement planning, including choice of payment plan, term, and interest rate of the final distribution is tailored by the pension administrator in consideration with the individual’s decisions.*The investment appreciation/depreciation in his pension assets is based on a 60% stock/40% bonds portfolio using the eleven year performance of one of the globally known mutual funds managed by an independent investment firm and incremental compensation starting from a $65,000 base along with a prior pension of $60,000.** Estimated general calculations for Mr. Contribore’s Defined Contribution Plan distributions.For simpler review on a conservative basis, given the very low current interest rate environment (around 1% after administration fees), we have used Mr. Contribore’s life expectancy in years (Actuarial Publications US Social Security) divided into the his lump sum accumulation with the understanding that the reader realises the periodic payments would normally be a bit more each month due to the interest income attributed to the annuity.Martha Myron, CPA CFP(US) TEP JP www.marthamyron.com is an international Certified Financial Planner™ providing Financial Counsel for Cross Border Living™ on international tax, estate, and retirement strategies for Bermuda residents with US connections, and US citizens living and working abroad.Member of the American Citizens Abroad Tax Advisory Council. www.americansabroad.org Contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.