LOUISE FAIRSAVE: Pension benefits

THE OCCUPATIONAL Pension Benefits Act was promulgated on February 1, 2011. The related regulations of the act were issued on February 15, 2011.

From the date of its promulgation, the act introduced the requirement for a joint and survivor’s pension benefit when preparing to pay new pension benefits. The next couple of articles will discuss some implications of the joint and survivor’s benefit and how it may affect estate planning decision-making.

A single life benefit pension deals with providing a monthly pension for the pension scheme member. It considers the member’s expected lifetime and provides a proposed monthly sum as the pension for that lifetime only. Alternate and lower amounts may be quoted for specific guaranteed periods which will be described later on.

For a joint and survivor’s or spousal pension benefit, the monthly pension benefit will be for the member’s expected lifetime as well as that of his spouse. Should the member die before his spouse, she would continue to receive a pension for her life; the survivor’s benefit, from his pension scheme. The same benefit will be eligible for the spouse of a female member; there is no difference in treatment by gender.

The spousal monthly pension benefit is typically less than the member’s monthly pension benefit. The new act requires that the spousal benefit be not less than 60 per cent of the member’s pension.

The existence of the spousal pension benefit therefore reduces the monthly pension amount that the pension scheme member would otherwise have got as a single life pension. The larger the designated spousal benefit, the lower will be the monthly pension provided to the pension scheme member.

Once the pension member has a spouse, the act requires that a spousal pension benefit must be provided. If the member is single, divorced or can adequately demonstrate that he is separated from his spouse, no provision is necessary for a spousal pension benefit.

In addition, it is possible to waive the right to a spousal pension. However, such a waiver must be provided in prescribed written form and be submitted to the pension administrators within 12 months of the start of the payment of the pension.

The pension administrator must know if a spousal benefit is payable or not in order to consider what monthly pension amounts are payable and to whom. In addition, the pension administrator would normally provide additional options where the pension scheme member can guarantee the monthly pension payment for say, five, ten, 15 or 20 years.

For each of these various options of guaranteed periods, if you live longer than the guaranteed period, the related pension amount remains payable for as long as you live.

The longer for which you seek the guaranteed period to be, the lower the monthly pension amount that will be provided, with the largest amount being the sum quoted for life with no guarantee period. Some impending single-life pensioners tend to choose the largest amount quotation in the monthly pension for life with no guaranteed period.

However, this choice means that if the member should die within a couple of months of starting to draw pension, no more pension amounts will be paid at all.

Much judgment of your health and life expectancy situation is required therefore in balancing the risks and choice of a guaranteed period in order to reap adequate rewards from the funds invested in the pension scheme.

In the case of a pension with spousal benefits attached, the difference in age between the member and the spouse is likely to affect significantly the decision to proceed with a spousal benefit.

For example, where the spouse is much younger than the member, the existence of spousal pension would provide additional income security for the younger partner should that spouse live on for many years beyond the member.

If the spousal benefit is waived, the surviving spouse will be left with no spousal pension income; so such a final decision must be taken with serious consideration.   

• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters.

Her advice is general in nature; readers should seek advice about their specific circumstances. Email LouiseFairsave@nationnews.com.

This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.