LOUISE FAIRSAVE: Pension changes 2
It is important to be familiar with the provisions of the Occupational and Pensions Benefit Act that was proclaimed at the beginning of February 2011. Today, we consider additional important changes that affect employees’ options:
First, an employee may object to becoming a member of the corporate pension scheme. Typically, this would not make financial sense as the employer always contributes to the pension scheme. In some cases, the pension scheme is even non-contributory, meaning that the employee is not required to make any contribution. In such pension plans, the employer makes the full contribution to the scheme.
Thus, objecting to becoming a member of a pension scheme leaves the employee to fully provide for his retirement on his own and in his own way. So employees will typically join the employer’s pension plan and remain a member until termination of employment or death.
On termination of employment before retirement, for whatever reason except death, the employee may move his accumulated entitlement in the pension scheme of his former employer into the pension scheme of his new employer, or into a private pension scheme if his new employer does not have one.
The mobility of accumulated pension funds is thus encouraged. Refund of accumulated pension funds to the employee is not allowed as in the past unless the amount is very small.
It is also possible for employees to make voluntary contributions to the corporate pension plan, subscribing additional funds beyond the amount required. To a specific level, such voluntary contributions can be made on an income tax deductible basis.
Thus voluntary pension contributions can be a desirable way of setting aside funds towards the retirement period. This is even more attractive with the new Act, as such contributions need not be locked into the pension provision as in the past. The new act provides greater flexibility in dealing with voluntary contributions.
A member of the pension plan may retire early, meaning not earlier than ten years before the normal retirement age, which is still 65 years for most corporate plans. So early retirement can be taken no earlier than age 55.
Employers are now required to give each retiring employee at least 60 days’ written notice of the impending retirement.
Finally, a specific spousal benefit is provided for in the new act. Spouses are entitled to a benefit of not less than 60 per cent of the pension benefit of their partner unless the right to that benefit is waived. A spouse who wishes to waive such a right would have to complete a specific form called Waiver Of Joint And Survivor Pension.
This waiver can be revoked at any time prior to the death of the employee. The pension plan may specify other dependents as recipients of benefits if there is no spouse.
The pension options provided to impending retirees are more complicated and spousal benefits can contribute to the variety of options presented.
Ultimately, each employee is responsible for preparing for retirement and for optimizing the benefits available. A solid start involves understanding the options available and the intricacies the employer’s pension plan.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature so readers should seek personal counsel about their specific circumstances.