Investment officials want Government to review its tax policy on private pension schemes. They complain that the absence of tax incentives has been a disincentive to people wanting to invest in Registered Retirement Savings Plans (RRSPs).
Principal and Consulting Actuary with Eckler Lisa Wade said given that people were no longer getting a concession on these pension plans, they have “reduced their level of voluntary contributions”.
“What happens is that when you choose to join your employer’s pension plan most employers’ pension plans require you to pay something into them. That is called your compulsory contribution.
“When the tax incentives were there most people topped up those even more with voluntary contributions which helped to ensure that when they reach retirement they would have a higher pension which would help them ride out any storm that would take place such as inflation.
“Right now, there is a really high level of inflation in Barbados and pension plans can’t afford to give pension increases to help offset that high inflation. So it is really important that government relooks their taxation structure. I think this has to come about as part of the review with respect to NIS [National Insurance Scheme] as well, if one of the options they are thinking of putting on board is some marginal increase within the contribution rate for NIS,” explained Wade.
Prior to 2015, individuals with RRSPs were able to claim a tax credit of up to $10,000 on their plan during the filing of their annual income tax return.
However, in 2015 that deductible was removed, which resulted in an immediate drop in the number of individuals taking out private pension plans.
Despite numerous calls over the years from pension fund, life insurance and mutual fund operators for the reinstatement of the incentive, there has been no movement by Government to date.
However, with growing concerns over the need for pension reform of the national pension scheme that experts have predicted could run out in as little as 12 years, officials have renewed their call.
Speaking during an Institute of Chartered Accountant (ICAB) forum on Wednesday, which looked at the topic Pension, Planning and Investment Options in Today’s Economy, Wade said the “kind of double taxation” on the RRSPs now was “a huge issue”.
“We have been lobbying the government on this for a number of years within the pensions industry because we do believe that it is extremely important that people now try to save, and one great incentive for saving is that tax incentive. It is really important that we try to have people become less reliant on Government and NIS,” she said.
Investment Director and Founder of Fortress Fund Managers Roger Cave also highlighted the need for incentives to encourage people to save for their retirement. “I think an incentive is a key way to encourage wider participation.
“Tax savings – pre-2010 we had an annual allowance of 27,500 per year, per individual – $10,000 for mutual funds, $10,000 for RRSPs and $7,500 for bonus. That has now all gone,” said Cave.
“The needs of today are always greater than those of tomorrow so unless there are incentives, people are not going to invest … [The] double taxation policy which came into effect in Barbados is simply unacceptable. It is seven years now, three different governments and we have written extensively on it and it has not been addressed. That is going to put stress on [defined contribution] plans, the NIS and retirees generally, from restructuring and lower expected returns,” he said.
“So more saving is going to be required and more investment overseas. We have fewer investment options than we used to and post retirement options are more and more relevant,” he said.
Cave said there was a need for a more diversified option of investments for pension fund schemes. He welcomed government’s policy to allow locals to hold a foreign exchange account, which he said was one “instant diversification”.
Meanwhile, Michael Millar, Head of Wealth Management at Sagicor Asset Management Inc., said while he agreed the tax consideration was a key driver for individuals to invest in private pension plans, “outside of the tax considerations we still need to take charge of our retirement planning”.
“It means that persons should go around, look at the various products and sit with the investment manager and understand how the product actually works and understand what are the underlying investment vehicles and then make a determination if the historical performance outpaces that of a bank account savings rate,” said Millar.
