Home' Trinidad and Tobago Guardian : June 28th 2015 Contents JUNE 28 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Susan just turned 50 and is a senior
manager earning $50,000 per month
before taxes. She changed jobs twice
in the last 15 years and in both cases
she contributed to company based pension
She worked for 10 years with first employer
and is now eligible to receive a monthly defined
benefit pension. The pension department
advised Susan of two options: either a full
pension of $18,000 per year or a lump sum
of $67,500 and a reduced pension of $13,500
In the second job she was required to con-
tribute 5 per cent of her base salary to the
new pension plan, equally matched by the
employer s contributions.
To sweeten the deal, upon signing her con-
tract 5 years ago, the company included a 10
per cent annual increment in her base salary
once she achieves a standard performance
The pension plan also allows for voluntary
contributions and Susan has been taking full
advantage of the maximum tax benefit since
She was told that the new plan is doing
very well and has been crediting her account
with an average of 7 per cent interest annually.
The pension booklet also spoke about a 25
per cent tax-free lump sum and a reduced
Unlike the previous employer s plan, this
one is based purely on how much she saves
and the value at maturity when her pension
could potentially have a rate of return 6% per
Susan has decided to continue her current
savings strategy but wonders if it would be
enough to meet at least half of her current
lifestyle expenses at retirement---assuming an
inflation rate of 8% per annum.
Susan also wants to know which pension
option she should select in each instance.
Nick's Assessment & Advice
Many people have absolutely no idea how
they would fare in retirement based on their
current savings programs. People like Susan
feel a little more comfortable when they have
at least two pension plans to add to their NIS
However, there is often a niggling feeling
that the money might not be enough and they
have no way to calculate such a figure inclusive
To help Susan gauge her future benefits we
must first get an idea of where her pension
fund is at present.
We will need to factor in her annual salary
increments, the voluntary contributions, the
employer contributions and then the interest
Once we know the final figure we can then
project what her income would be and then
offer some guidance as to which pension option
Value of New Pension Plan 2
This plan is based on a salary of $60,000,
however, this figure is the result of 5 years of
increments at 10 per cent and will continue
to increase at this rate for the next 10 years.
The contributions to this plan are 5 per cent
from Susan, 5 per cent from the company and
any voluntary contributions she makes to the
maximum of the deductible tax limit for retire-
ment savings plans.
This annual tax-deductible contribution
limit has been $30,000 since Susan started
working with the new company in 2010 up
to 2014 and in 2015 onwards it will be $50,000
Any contributions she makes to retirement
savings plans plus 70% of her annual NIS
contributions must be subtracted from this
limit to get an idea of her annual voluntary
For our purposes we shall assume a flat
monthly NIS contribution of $500 and apply
the 70 per cent adjustment. Table 1 shows the
progression of her income from inception and
how it changes. It also shows the growth of
the pension fund account factoring also
employer contributions; interest and voluntary
contributions. You will notice for a few years
Susan s voluntary contributions were zero.
This was because her basic contributions
plus NIS would have exceeded the tax con-
tribution limit for that year.
Many times people contribute over and
above their tax-deductible limits but they run
the risk of being taxed a second time at retire-
ment. Even if all money going to a registered
retirement plan does not benefit from a tax
break, all of it, will be subjected to tax at retire-
ment, depending on the person s tax bracket
at that time.
Retirement Benefit Plan 2
Using the projected fund value at age 60,
Susan will be entitled to a full annual taxable
pension of $90,000 ($1,500,047 x 6 per cent).
She will also have the option to take 25 per
cent of the fund value tax-free ($1,500,047 x
25 per cent = $375,012) and a reduced annual
taxable pension of $67,502 ($1,500,047 -
$375,012 = $1,125,035 x 6 per cent).
Tax Treatment of
Retirement Benefit 1 & 2
Currently, persons aged 60 and over, do not
pay taxes on the first $72,000 ($6,000 per
month) of annual taxable income. Anything
above this figure is taxed at a rate of 25 per
cent. In plan 1 Susan is presently eligible for
a full pension of $18,000 or a reduced pension
of $13,500 if the tax-free lump sum of $67,500
is paid. In both these instances she will be
taxed on the entire amount because she is still
working and has already exceeded the annual
tax-free personal allowance of $60,000 ($5,000
She might be able to escape the tax charge
on part of her pension benefit by taking the
tax-free lump sum of $67,500 now and only
pay tax on the reduced $13,500.
When we look at the numbers we realize
that the lump sum is really 25 per centof the
full annual pension ($18,000 x 25 per cent =
$4,500) multiplied by 15 years.
So she is actually taking a quarter of 15 years
"full pension" up front as a "salary advance"
and she is getting it tax-free too.
If we consider the after tax effect of the
$4,500 ($4,500 x 75 per cent = $3,375) the
lump sum would be the equivalent $3,375 mul-
tiplied by 20 years. In both plans1 and 2 she
can exercise this option and save on taxes.
Twenty years is a long time and if we factor
in inflation we would realize that she might
really be better off taking this advance payment
sooner rather than later.
Susan wants to know how her pension plans
would measure up against her retirement needs
after we account for 8% inflation.
We need not go that far because at retire-
ment her combined annual income would be:
$81,002 ($13,500 + $67,502) plus NIS, which
hopefully would be more than the $36,000
annually it is today. To maintain even 50% of
her current lifestyle Susan has a lot of savings
and wealth creation to do in order to fill that
C o o o o o
o o o
I o o o o
o o :
F Co C o
Saving for a comfortable retirement
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