Group retirement plans and you...
Today we at Bourse take a closer look at group retirement plans and the benefits that these plans provide to both employers and employees. What should employers seeking to get the best retirement returns for their employees be looking for?
Last week, we discussed the importance of starting to plan for retirement at an early age. In doing so, the benefit of compounding is available to the investor in building wealth. We also briefly looked at historical returns of retirement funds in Trinidad and Tobago and how investing in these funds can provide returns that are higher than money market accounts in the long term. Group retirement plans are one of the best ways to save for retirement, providing advantages to both employers and employees.
What is a group retirement plan
A group retirement plan is a long term investment which has been designed for employers who are seeking a convenient and cost effective method to either provide retirement benefits for their employees or to augment present retirement benefits. The investment objective is usually to achieve long-term real risk-adjusted returns, with an emphasis on measured growth. This is done primarily through investments in a diversified portfolio of debt and equity, skewed towards the long term.
The major difference between a group plan and an individual plan is that contributions are paid directly from the employer on behalf of the employee to the retirement fund.
Some of the benefits to the employers in Trinidad and Tobago associated with group retirement plans are: —
• All contributions made by the employer on behalf of its employees can be claimed as a deduction in computing the company’s chargeable profits
• There are little/no administrative burdens to the employer, as would be associated with a pension plan.
• The employer selects the contribution levels, frequency of contributions and maturity date on behalf of its employees
• The investment responsibility for the plan is delegated to the retirement plan provider. In other words, the retirement fund’s portfolio is managed by experienced professionals with proficiency in the field of investment management
Several benefits also accrue to employees of participating in a group retirement plan: —
• Contributions made by the employer on behalf of its employees are tax free. This is if the aggregate of those contributions, together with contributions made by the employees to other individual deferred annuity plans and National Insurance, are no more than 1/3 of the employee’s chargeable income or 20 per cent of their gross income (whichever is higher). End-of-year bonuses paid out by companies can be redirected in these retirement funds, with the attendant tax advantage benefits to employees.
• With some retirement plans, there are no upfront charges. This means that all of your contributions begin working for you from day one. In other instances, deferred annuity and pension fund plans may incur upfront administration charges.
• Retirement funds are typically balanced between equity and fixed income, providing higher returns than money market accounts or savings accounts over the long term. As with most other funds, there is investment risk if the fund’s assets do not perform as per expectations. This risk, which cannot be eliminated, is mitigated through the use of professional investment managers.
• Employees can appoint or change their beneficiary at any time throughout the life of the plan. Should you die prior to the maturity, the full value of your plan will be paid to your beneficiary, tax exempt.
• At maturity, you have the benefit of selecting an annuity provider you feel most comfortable with, unlike some of the deferred annuity providers with which you may not have a choice.
The sooner you start saving, and the more often you save for retirement, the better. Time works to your advantage. You should, of course, set goals and save as much as you can, but starting as soon you as possible is the key.
What happens at maturity?
The maturity age of retirement plans are between the ages of 50 to 70. This provides more flexibility as compared to pension plans which generally mature at age 60. Once the retirement fund maturity date is selected, the employer can opt to have this changed by simply completing the required form on behalf of the employee. This change of date is subject to the approval of the Board of Inland Revenue (BIR).
On the maturity date of a group retirement fund, the employee can receive either:
(a) 25 per cent of the Plan Value as a tax-free cash lumpsum. The balance of 75 per cent will go towards the purchase of an immediate annuity from an annuity provider. This will generate a monthly income for life, or
(b) 100 per cent of the Plan Value will go towards the purchase of an immediate annuity from an annuity provider which will generate monthly income for life.
A good retirement fund has the potential for superior returns, flexibility in contribution levels, and a high aggregate plan value at maturity. Investing in a basket of securities for a longer time horizon will generally provide higher returns than savings deposits or money market accounts.
What should employers look for
There are several group retirement fund providers in Trinidad and Tobago, of which Bourse is one. Employers should choose carefully to maximise the benefits to their employees. Important criteria in choosing a group retirement provide would include: —
I. Investment expertise of the Provider
II. Ability of the group retirement provider to diversify asset class holdings locally and internationally
III. Expertise of the provider in portfolio diversification by currency. This is an advantage which group retirement funds have over pension funds. While pension funds are limited to 20 per cent of the portfolio in foreign assets, group retirement funds can be structured to have far higher foreign asset holdings. This should be an important consideration for employers seeking to maximise long term returns for their employees, given the current negative real returns being experienced in local investments where inflation rates are exceeding current long term investment yields on fixed income assets.
As with any important investment decision, investors should consult with their trusted investment professional/adviser to make the best choice possible. Employers seeking more information on group retirement funds can email us at email@example.com, call Bourse at 628-9100 or visit us at any one of our offices. Further information is also available on Bourse’s website at www.bourseinvestment.com and Bourse Securities Limited Facebook page.