A pension is a method of putting money aside for retirement. This is very often one of the biggest investments most people make. Because retirement can last for 20 or 30 years it is important to understand what pensions you may have and how they build up a retirement income. The basic types of pensions that are or may be available to you are the following –
If you're working, you are usually building up a Social Insurance record. This means you are accruing the right to get an Old Age Pension when you reach a certain age. Currently this is 60 for women and 65 for men.
There are two types of occupational pension schemes which may be offered by employers - salary-related or money purchase pension schemes.
These are schemes offered by employers that provide pensions for their employees based on the employee's salary and years of service. They are sometimes called 'defined benefit' or 'final salary' schemes. The employer contributes to the scheme and there are trustees who look after scheme members' interests. You can only get salary-related pensions through an employer.
You can get an annual statement from the salary-related occupational pension scheme you belong to in your current job. This will show how much retirement pension you have built up so far and the amount you might build up if you carry on in the scheme until retirement.
These schemes are sometimes called 'defined contribution schemes'. They do not provide a pension based on your salary or years of service. Instead, they build up a pension fund that you may convert into an income when you retire. The employer must always contribute to an occupational pension scheme and with effect from 25 June 2009 no carry back of contributions is allowed.
There are trustees who look after scheme members' interests. Often you may be able to top up the pension fund from your own resources. These are called 'Additional Voluntary Contributions' or 'AVCs'. When you retire, the scheme administrator will buy an annuity for you to provide income for your retirement or you may be able to buy one yourself.
You should get an annual statement showing how much pension income you might get based on the value of your pension fund today, taking account of future payments into your plan, how the plan might grow, future inflation and pension income from your fund when you retire. These statements only provide an illustration of potential returns, which are not guaranteed.
The Government of Gibraltar has set up the Provident Trust (No3) Pension Scheme. This is an occupational money purchase pension scheme that is available specifically for private sector employers.
The pension scheme is a low-cost defined contribution scheme where both employers and employees are able to contribute in a tax efficient manner in order to save to provide the employee with a pension on retirement.
The pension scheme is administered by the Government of Gibraltar and employers only obligation is to make the employer’s contribution in respect of an employee during the period that an employee is working for that employer. When the employee moves to another job with a different employer that new employer makes the contributions to the same scheme. The scheme is mobile in the sense that an employee can continue to be a member of the scheme on changing employment.
Retirement annuity contracts (often referred to as Personal Pension plans) are money purchase pensions and are an option for those in Gibraltar who wish to arrange their pensions privately. This may be the case where you are self-employed or work for an employer who does not have a pension scheme in place. Retirement annuity contracts are not classified as occupational pensions although they may be funded in whole or in part by an employer. However, you cannot be a member of an occupational scheme and also make contributions to a retirement annuity contract at the same time.
Retirement annuity contracts must be approved by the Gibraltar Commissioner of Income Tax if tax relief is to be obtained on contributions. Before approval is granted, the Gibraltar Commissioner of Income Tax must be satisfied that certain conditions will be adhered to. These conditions include, for example, that the individual may not have his contributions returned and will not receive any benefits before age 55 and that the underlying investments are of the correct type.
A retirement annuity contract is normally established under a trust, the form of which must have been agreed by the Gibraltar Commissioner of Income Tax.
As with any money purchase pension, the amount of your fund when you come to retire is not guaranteed and depends on how much has been paid in, the type of investment fund or funds you choose, how those investments perform and the level of charges. A retirement annuity contract will normally offer you a range of investment funds, with differing degrees of investment risk and potential investment growth. The provider will also charge you for managing your money. You should receive a pension statement each year from the provider. It normally shows you how much you have contributed, the current value of your fund and an estimate of the value of your fund at normal retirement age.
When you retire all or part of your pension fund may be used to buy an “annuity”. An annuity will pay you a regular income during your retirement. That income will depend on the size of your pension fund and annuity rates at the time you take your pension. Some providers may provide a guaranteed annuity rate which could be higher than the ‘open market’ rate, although this is increasingly rare.
Most retirement annuity contracts also provide a level of flexibility. For example, you can contribute regularly or occasionally, you can change the amount you pay or you can stop paying in and restart at a later date. You can also take your retirement annuity contract with you when you change jobs. If your employer does provide a scheme and is willing to contribute to it, this is likely to be a better way of providing for your retirement than a retirement annuity contract.
Occupational pension schemes; retirement annuity contracts and (with effect 1 July 2008) personal pension schemes can apply for approval for tax relief from the Gibraltar Commissioner of Income Tax.
Important changes introduced on 1st July 2006
On 1st July 2006, the Gibraltar Government introduced some significant changes in the tax treatment of pension benefits received from Gibraltar Commissioner of Income Tax approved occupational pension schemes and retirement annuity contracts:
1. For those aged 60 or over, pension income is taxed at 0%. This means that if your pension is your sole source of income it will be tax-free. This is the case whether the income comes from a final salary scheme or an annuity purchased with the proceeds of an occupational money purchase scheme or a retirement annuity contract.
2. The obligation to purchase an annuity is removed. This means that if you have accumulated a pension fund from an occupational money purchase scheme or retirement annuity contract, you may take 75% of the amount as a lump sum in lieu of an annuity and as such may be commuted tax free in all cases, at your normal retirement date (occupational money purchase scheme) or 55 (retirement annuity contract).
In some cases, where the rules of the pension schemes provide them within the power to do so, the trustees of an occupational money purchase scheme may insist that an annuity is purchased with some or all of an individuals pension fund.
To answer this question, you should consider whether your Old Age pension, any existing private pensions, any employer-sponsored pensions and any other sources of income will be enough for you to live on when you retire? You also need to think about the standard of living you want to enjoy when you retire and the income you will need to support it. Ask yourself these questions:
Try to work out how much money you will need to live on when you have retired to afford the things you’ll want and the things you’ll want to do.
You cannot get your Old Age Pension until you reach pensionable age (currently 65 for men and 60 for women).
Check with your employer if you are not sure about membership. If you are a member of an employer’s scheme, you should get regular statements setting out what your benefits may be when you retire. If you cannot find these statements, check with your employer.
If you are already contributing to a pension, you need to find out what retirement income this might provide. Look at the most recent benefit statements you have been sent, or check with your pension plan provider.
Check the pension plans you have contributed to in the past but no longer pay into today. You need to have some idea of the retirement income you may get from them.
To check on the value of old pension plans, look at the most recent benefit statements you have been sent. If you cannot find any statements, contact your pension plan provider, for example the insurance company or the employer that offered the pension to you.
If the income you expect in retirement is less than you want, you need to think about saving more to make up the difference. A pension may be one of your options. But before you decide anything, you need to think about your priorities.
These are questions which you should ask your financial adviser. Some of these will be relevant to occupational pension schemes as well as to other types of pension products.
You may have other financial commitments that will affect what you can afford to contribute to a pension. You may feel that other financial needs must come first. For example, ask yourself:
For example, mortgage repayments, rent, life assurance, and credit cards.
Remember that saving through a pension scheme is a long term commitment. Any change in how you spend your money may need to last for a long time.
Before considering a pension you may want to consider other issues. For example, you may want to consider life assurance protection for you and your family, or building up some “rainy-day” cash savings.
If you are a member of your current employer’s pension scheme, it may make sense to pay additional voluntary contributions (AVCs) to that scheme rather than contribute to a personal scheme. If you are currently contributing to a pension, it may also make sense to increase your contributions to that scheme rather than start a separate pension.
If you have small pension funds you may be able to combine them to buy a single, bigger annuity – but first check if your pension provider(s) charges a fee for this transfer.
It is also possible to cash in some small pension funds although this can only be done in certain circumstances. Your pension provider should be able to advise you if this is possible and how you can do this.
An annuity is an investment product which converts your pension fund into pension income. This is usually paid for the rest of your life.
There are different types of annuity to suit your needs and circumstances. You will need to think about whether you need to provide for your spouse or partner, especially if they do not have their own pension arrangements.
The basic types of annuity are:
An annuity just for you if you do not have a spouse or partner, or if they do not rely on you for income.
An annuity that will pay out to you during your lifetime and to your spouse or partner after your death.
You can also choose whether you want your single or joint life annuity to be:
This pays out the same pension income throughout your life. You will get more money to start with than you would from an escalating annuity (see below), but it will not increase in line with inflation;
There are two main types of escalating annuity:
- fixed rate – your income increases each year by a fixed rate (for example, 3%); or
- RPI-linked – your income goes up or down in line with inflation.
An escalating annuity will start at a lower rate than a level annuity and gradually build up.
This scheme was set up by the Government of Gibraltar. It provides for the investment and draw-down of accumulated pension fund monies for members of approved pension schemes where the purchase of an annuity is required. The scheme allows for the purchase of an immediate or deferred annuity. Eligibility for the purchase on an immediate annuity is restricted to individuals who have retired at normal retirement age, whose employment has terminated and who are at least 50 or who have retired due to ill health. A deferred annuity may be purchased by an individual whose employment has terminated before attaining the age of 50.
Benefit payments for immediate annuities include a monthly payment equal to the investment income earned on the capital invested and the option to draw-down 2.5% per year of the original capital invested. On deferred annuities the investment income earned is reinvested until the individual reaches pensionable age when up to 25% the accumulated capital can be paid as a lump sum and the remainder is used to purchase an immediate annuity or transferred to another approved annuity provider.
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