RETIREMENT PLANNING is an important aspect of life. The ideal retirement system does not exist in a vacuum, however, it is holistic, providing several sources of income for workers in their retirement. The World Bank, in its report Averting The Old Age Crisis, recommends a multi-pillar system for the provision of retirement income security.
Pillar one is a mandatory publicly managed and tax-financed public pension. The equivalent in Barbados is our National Insurance Scheme (NIS), which provides a basic or minimum public pension. The second pillar is a privately managed plan and would reduce the demands on the first pillar. Examples are group pension plans or personal savings accounts. The third pillar is voluntary and would enable individuals to make additional savings for their retirement years.
An ideal retirement system also provides taxation support from the government to, among other things, encourage long-term pension savings within the community, thereby offsetting myopia among those individuals who tend to focus on present needs; compensate pension scheme members for the lack of access to their savings in the short term; and increase the level of future retirement benefits, therefore reducing the amount of means-tested government benefits paid in future years to persons with inadequate pensions. Barbados has been well positioned alongside countries in the region and those further afield such as the United Kingdom, Canada and the United States, as a progressive nation in relation to its NIS and corporate and personal retirement savings plans.
Over the past 50 years Barbados has, for example, built a competent and well managed regulatory infrastructure for pensions. This has led to the establishment of pension funds, pension providers, the Pensions Act and the Financial Services Commission. Through our pension system more Barbadians have been encouraged to save for their retirement especially with the incentive of tax allowances. These allowed them to benefit from tax savings now even as they saved for their future retirement.
The proposed removal of personal tax allowances including those for Registered Retirement Savings Plans (RRSPs) and group pensions from income tax year 2015, as announced by Minister of Finance Chris Sinckler in his Budget presentation, will likely reverse these gains. Pension tax allowances are far too important to be removed at this stage in our nation’s development. Firstly, they help reinforce the need that while we’re in a productive stage of life we need to save money for our retirement especially in light of us living longer and the strain this may cause on the NIS.
There are also implications for future working populations, where our children and grandchildren may be forced to look after their parents and their children at the same time because of inadequate savings being made during their lifetime. Do we really want to furnish future generations with such a burden? Secondly, any savings in revenues by the removal of these allowances (we estimate up to $16 million per annum) are likely to be significantly outweighed by the future costs and burden on the state of those contributions not having been put aside for people to cover their living expenses when they retire. It is seriously penny-wise and pound-foolish.
Thirdly, the removal of the tax deductions for contributions without any commensurate changes in the taxation of pension benefits results in “double taxation”. As a result, persons are likely, and rightly so, going to stop making any further contributions to their RRSPs as they would be better off in the future by saving and investing outside of taxable regulated pension schemes. This would be a most unfortunate development. We, therefore, greatly encourage Government’s reconsideration of its decision with a view to either reducing the allowances or implementing a cap on RRSPs and a group pension allowances, individual or combined, instead of eliminating them altogether.
All working Barbadians should start or continue to save and invest in “tax-free” investment products and services. We can’t emphasis this enough. We should also be aware of the likelihood that more and more of our population will become reliant on a state that will be less able to adequately meet its needs. The sudden change in the fee policy for Barbadian students at the University of the West Indies is a stark reminder for us all that we should take great individual responsibility for our future and remember that current governmental practices may not always be in place.
We encourage policymakers not to jeopardise our future with an ill-judged tax policy for pensions, which at best will have a minimal effect on improving short-term cash flows and certainly will do little to resolve the national fiscal deficity.
Roger Cave is investment director of Fortress Fund Managers, a Barbados-based investment firm operating since 1996.
