A Guide: Pensions
Questions and Answers
Do I need to save for my retirement through a pension?
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:
- Roughly how much will I need to live on when I retire?
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.
- How and when do I qualify for the full Old Age Pension?
You cannot get your Old Age Pension until you reach pensionable age (currently 65 for men and 60 for women). There are also Social Insurance requirements (see above).
- Does my current employer provide a pension scheme and how much will that give me?
Consult 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.
- Am I already contributing to a pension? If so, how much income will this provide me?
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.
- Have I any old age pensions, maybe from previous employers’ schemes or from other pension schemes? If so, how much income will these provide me?
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.
It is important that you review these statements.
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.
You should also consider taking financial advice.
What other factors should I consider?
- Whether the contributions you make to a pension will be eligible for tax-relief.
- What the tax position of the pension itself is i.e. whether it has been approved by the Income Tax Office.
- What the charging structure of the pension is initially and an on-going basis, for example, if you decide to top-up or the amount of the contributions paid is increased.
- How increases to contribution are dealt with.
- Whether there is a guaranteed annuity and the rate of that annuity.
- Whether there are any transfer charges if you decide at a later stage to move to another pension scheme.
- Whether there are any penalty charges.
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.
What else should I think about before contributing to a pension?
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:
What are my other financial commitments?
For example, mortgage repayments, rent, life assurance and credit cards.
Would I be prepared, if necessary, to give up anything so that I can pay into a pension?
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.
Should I be thinking of other things first?
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.
How do I convert my pension fund into income?
- If you are a member of a salary-related occupational pension scheme, the scheme administrators will get in touch with you and pay your pension to you directly. You can usually take part of your pension fund as a tax-free lump sum.
- If you are a member of a money purchase occupational pension scheme, the scheme administrators will usually buy an annuity for you, or you may be able to buy it yourself. However, this is no longer a legal requirement in Gibraltar so you may have other options available.
- If you have AVCs you should speak to your pension scheme administrators to find out what your options are.
- Another option for some pensions, is income withdrawal. You can take part of your pension fund as a tax-free lump sum and you then draw a regular income from what is left while your pension fund remains invested.
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.
What is an annuity?
An annuity is an investment product which converts your pension fund into pension income. This is usually paid from retirement for the rest of your life.
Do I need an annuity?
No. Since October 2006, 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 other defined contribution pension plan, 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 with 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.
What types of annuity are there?
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:
- single life
An annuity just for you if you do not have a spouse or partner, or if they do not rely on you for income.
- joint life
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:
- a level annuity
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;
- an escalating annuity
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.
Gibraltar Pension Annuity Trust Scheme (PATS)
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.