Tuesday, January 23, 2018

Investing in your long-term future

Today we at Bourse address the investor focusing on life after employment, that is, investing for retirement. The 2015 Budget recently proposed enhanced incentives to those individuals preparing financially for retirement, in the form of an increased amount in tax deductible contributions to registered annuities. We consider the double benefits offered to the investing population, in the form of increased savings (through lower taxable income) and the power of compounding from investment. While there are several ways to invest for your retirement, we focus on retirement funds and their benefits as compared to more traditional retirement savings approaches.

Retirement Funds at a glance

Investors can participate in retirement funds through different investment vehicles, namely:

1. An Individual Retirement Fund, which is a long-term investment that allows the investor the opportunity to accumulate cash for maximum retirement benefit and at the same time obtain significant tax benefits. The Individual Plan is governed by Section 28 of the Income Tax Act and the contract is between the Individual and the Retirement Fund Provider

2. A Group Retirement Fund, on the other hand, is governed by Section 134(6) of the Income Tax Act and is a contract between the Employer and the Retirement Provider. It is also a long-term investment, which has been designed for employers seeking a convenient and cost effective method to either provide retirement benefits for their employees or to augment present retirement benefits. There are two general routes through which contribution can be made to a Group Retirement Fund, which we will discuss in more detail in our next article.

Retirement Incentives Increased

As detailed in our last article, effective January 1st, 2015 investors can look forward to an increase in the limit for contributions for registered annuities. The deductible amount has been raised to TT$50,000 per annum, from the previous allowance of TT$30,000. This move will now allow investors to benefit from annual tax savings at the current tax rate of 25 per cent up to TT$12,500 per annum, versus the TT$7,500 previously enjoyed. This increase in tax deductibles is likely to benefit the high to high middle-income investors mostly, that is, individuals with significant disposable income to commit to retirement products. For example, to fully take advantage of this incentive, an individual would have to contribute just over $4,166 on a monthly basis to a retirement plan/fund.

As an example, let us assume an individual earns a gross annual salary of $180,000. Were this individual not to contribute in any form to a retirement plan/fund, and assuming the only allowance for tax purposes is the personal allowance of $60,000 per year, total taxes paid should amount to $30,000. In comparison, the individual who opted to fully utilise the newly available exemption through contributing to a retirement plan/fund should pay annual taxes of $17,500, about 40 per cent less in taxes.

The tax benefits of $12,500 per annum in this example could be significant on its own, even if invested at even a moderate rate of return. As an illustration, $12,500 per year in tax savings, invested for a period of, say 10 years and at an annual 5 per cent rate of return would give the individual and ending value of roughly $165,000. Of this, $125,000 would be accrued in taxes saved, while roughly $40,000 would be generated through investment returns.

The benefits of investing

While reducing your tax payment is already an attractive prospect, building your wealth through the power of compounding offers further incentive to invest for retirement. Exhibit 1 highlights the cumulative power of investing for retirement, as opposed to merely saving. Assuming that you contribute $50,000 annually to a retirement fund for a 10-year period in which the fund generates a 5 per cent net annual return, your ending investment balance would be just over $660,000. This compares favourably to the $500,000 which would have been accumulated through savings alone, or 1.3x more in wealth accumulation.

Diversified investment for quality returns

Within the local economic climate of high liquidity and lower rates of return on fixed income instruments, the ability to invest beyond the local and even regional markets is important step in securing higher long-term returns for a retirement portfolio. An investment advantage of the retirement fund, when compared to the traditional pension plan, is the formerís ability to better diversify across asset classes, currency and geography. In other words, retirement funds can be more flexible in their investments, which may provide enhanced benefits in the form of higher returns and more manageable risk when compared to pension funds. Pension funds, due to more stringent restrictions in allowable investments, are more limited in terms of the level of foreign investments they may hold.

There are several local retirement providers, of which Bourse is one, that can assist employers in establishing a rewarding retirement portfolio for its employees. Information regarding returns of local retirement funds are neither easily accessible nor verifiable. Using Bourseís Group Retirement Fund (GRF) as an example, the Fund has generated year to date (YTD) gross returns of 4.6 per cent and 3-year annualised returns of 7.6 per cent.

Retirement planning, while requiring considerable commitment can produce a fulfilling payoff and provide the financial security needed at an important time in any individualís life. For more information on these and other investment themes, please contact Bourse Securities Limited, at 628-9100 or e-mail us at funds@boursefinancial.com.