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You can live well tomorrow off what you save today

While some pensioners are living comfortably in Bermuda, often we either know or hear of the ones who are barely able to survive in these financially challenging times.

This problem begs the question why are so many elderly people suffering today?

Lisa Jackson, chief operating officer of Maximum Pension Services (MPS) Limited, believes lack of education and the absence of mandatory pension plans are to blame.

“Most larger establishments have always had plans, but not the smaller companies. A lot of the older folks were doing jobs like care-taking- they worked for 30, 40 years but no one ever thought about a pension for them.

“They had their salary but they didn’t have the know-how or someone else looking out for them. Basically seniors are living off what little the government can offer them.”

While hindsight is 20/20, we need to learn from their mistakes and take control of our money and savings before it is too late.

In 1998, the Government introduced the National Pension Scheme (Occupational Pensions) Act, which obligates employers to establish and maintain pension plans for all of their employees. This was their attempt to ensure that all members of the workforce were saving money expressly for their retirement.

The two major pension plans used throughout the Island are defined contribution and defined benefit.

“Defined contribution is highly recommended,” says Ms Jackson. “It’s a payroll deduction from the employee and the amount is matched by the employer.”

In 2000, a new legislation introduced a schedule detailing that deductions would be one percent of the employee’s pay. This amount increased every year until now, where it sits unchanged at five percent.

“The defined benefit is determined from your salary, years of service, and age. It can also be determined now for when you are 65,” Ms Jackson explains.

“This plan is more costly for employers but some larger companies still use it, but going forward everyone is trying to switch to the former.”

If you decide to change jobs throughout the course of your career, your pension is transferable from one company to the next.

“Depending on when you want to leave, you have a limited number of options,” Ms Jackson says.

“Where you are always entitled to your money, law states that you are required to be employed a minimum of two years before you can benefit from the employer’s contributions.

“If you leave before the vesting period, you are able to take your contributions as cash, but the employer will not match it.”

She continues: “If you leave after the vesting period (two years) but say,decide to go back to school instead, you get both yours and the employer’s contributions, but not as cash.

“Ultimately you’re supposed to transfer it to another company plan, but the other option is a prescribed retirement product or a personal pension plan. You have a plan in your name that is locked and designated for your retirement.”

If you switch to a government job from a private company you will have to open up an individual plan anyway: “Government’s plan is not set up to accept transfer values yet.”

Why do you need to save now?

“Is the average pension allowance enough to sustain a person through their retirement years?” Ms Jackson muses. “No, not the government pension. They don’t think that 30 years from now they will be able to provide for those who will be 65, which is why the private pension plan was introduced.

“A lot of seniors today are getting pensions from the government worth $600 a month, maybe $800,” Ms Jackson notes. “But think about it, $800 doesn’t cover rent of a studio nowadays, so the average senior citizen has to live with someone. Do they have rental income? Some do but it’s not going to be enough to subsidise their needs.”

To avoid such a bleak future, the government made it mandatory that employers lock their employees into a pension plan after two years.

“Legislation says that every full time employee, aged 23 and over, must be a part of the pension plan,” Ms Jackson says.

“If I had to work out now what I needed to save so that I could live at this comfort level when I’m 65 and not getting a salary, it would be almost $4000 a month. If you start working at 20, you’ve got until your 65- that’s a 40 year span.”

She furthers: “The more money you put aside in the early stages of your career when your earning power is higher, the better. If there are any ups and downs in the market you have the time to ride it out and the longer you work, the longer you can contribute.”

You can request that your employer deduct another five percent from your paycheque to credit your pension account, although the employer does not match that extra amount.

“Basically, you get 10 percent coming out, and your employer matches five,” she says. “The only way you’re going to have a decent pension by the time you’re 65 is by being more conscientious and actually making voluntary contributions.

The defined contribution plan culminates in an accumulation of the funds that have been deducted from your paycheque over the course of your employment.

“If you have been contributing five percent of your pay, now that you’re 65, say that you end up with a figure of $10,000,” Ms Jackson suggests.

“That $10,000 is not given to you as one lump sum. Currently the only products available are annuities that are monthly income.”

The $10,000 is calculated into an annuity schedule based on your age and sex, and assigned annuity rates.

“Annuity rates are low right now so pensions are really low and that hasn’t changed in, I would say, ten years,” Ms Jackson adds.

“On top of that, women outlive men and so are expected be compensated for a longer period of time. Your amount could be $200 where your husband’s could be $300.

“That is also assuming your retire at the normal age of 65. If you retire earlier, at 55, you’d get slightly less because they’d be paying it out even longer. That is the significance of annuities.”

There are different types of annuity that dictate how much money you receive and what happens to it, if there is any left, once you pass on. Joint survivorship and lifetime guarantees of 5, 10 or 15 years are common plans.

“Joint survivorship dictates that “Joint survivorship dictates that once you pass, the remainder of the funds go to your beneficiary for their lifetime. Once they pass, that’s it,” she explains.

“The lifetime guarantee for 5, 10 or 15 years is always payable for your lifetime because you are the person that it benefits. But if you purchase a five-year annuity and you die two years after, your husband will only receive the last three years of payments, depending on what the plan states,” Ms Jackson continues.

“And all the little factors change the amount that you will receive monthly. For life only, you might be getting $200 a month, but if you put your husband on it you’d get less.”

“It’s a rip off in one sense if you have a short life span, but if you have a long life span and you outlive the cost of your annuity, they will still have to keep paying.”

Hypothetically, if you are 65 and have saved $100,000, your annuity may only pay $200 a month. If you die five years later, you have not received that full $100,000 and it goes to the beneficiary, but only until the end of that payment. The annuity takes the $100,000 and spreads it out over what has been calculated to be your life span.

If you live 30 years after you retire, however, you have most likely outlived the cost of the annuity payment.

“This is where the insurance company and reinsurance company kick in,” she says. “They say, ‘Okay, we’ve paid out this person’s annuity and they are still living, now let me pull out my second resource and get that money to them.’ And for your entire lifetime you get the exact same amount.”

As long as you are a Bermudian in the work force you will receive a government pension. This is calculated under the defined benefit programme and that final amount is entered into a payment schedule specific to you.

“Government pensions can range from $900 to $600 or $500 at the lowest,” Ms Jackson says. “You will always receive a government pension, as long as the monies are still out there. They don’t think that there will be no money, but they also can’t predict it. The government pension will not be enough to sustain you in your retirement.”

But what will happen if the Government decides to push back the retirement age from 65?

“It does give people more time to work- some will like it and some won’t. As long as it’s not mandatory and you still have the option of early retirement, it’ll be good because you will be in the workforce longer and you can put more money aside. You already have the option of early or late retirement,” Ms Jackson says.

“If you retire at 55 your benefits are obviously going to be slightly less as they’ll be paid out over a longer period of time.”

“I don’t think that private pensions are going to be enough to alleviate the stress on the government pension plan though, because the government’s plan has to cover the entire population,” Ms Jackson adds.

But hopefully your cognisance will afford you with a comfortable pension by the time you reach retirement age and you will not have to rely on the government to take care of you, like so many are forced to do today.

Plan for your golden years