The Best Way to Save for Retirement

Will the pension that your employer pays be enough for you to financially support yourself in retirement? If not, it is wise to start thinking about what you can do now to put yourself in a better financial position in the future. There are a wide variety of financial products that you can use to set aside money as you prepare for retirement, but only one of them is a cut above the rest.

• Savings Account at a Bank

  Although you will enjoy deposit insurance coverage up to $200,000, the purchasing power of the money you save will not be able to keep up with inflation because banks pay little to no interest. Since you will have very easy access to the funds in these types of accounts, you may be tempted to dip into your savings from time to time and hamper your efforts to save. 

• Shares Account at a Credit Union

  You would most likely enjoy higher returns with a credit union but may not have deposit insurance since only a few of them offer coverage with TTCUDIF. Funds tend to be a bit harder but not impossible to access. 

• Mutual Funds 

  As these are investments, there is no deposit insurance and you will have to find an acceptable balance between risks and rewards. Investments with the potential for higher returns are usually associated with the higher risk of losing some or all of the value of your investment. Mutual funds vary on whether and under which conditions you can access the funds. 

• Endowment Plans and Whole Life Insurance Policies 

  Life insurance policies with savings components can be an attractive option especially when they will have a guaranteed cash value by the time you reach retirement age. However, if you accidentally forget to pay the monthly premium, the policy will lapse and you can permanently lose your insurance coverage, as well as, any accumulated cash value. If you decide to surrender the policy at any time, you will only receive a partial refund of the payments you had made. Cash withdrawals that don’t cancel the policy may or may not be permitted before a certain number of years have passed. 

Deferred Annuity Plans  

This is a type of investment which sacrifices the ability to access the funds for the potential for higher returns. However, they have a unique benefit; a government-backed incentive that allows you to save money now when you save for the future. They are registered with and approved by the Board of Inland Revenue (BIR) of T&T which means that any contributions that you make will reduce the amount of income tax that you owe the government in the given calendar year.

This benefit applies to deferred annuities that are company-managed group pension plans, as well as, individual pension plans that you open directly with a financial institution. Essentially, for every $100 that you contribute, you’ll reduce your tax liability by $25. This applies to contributions made to the National Insurance Scheme (N.I.S.), company and individual pension plans, up to $60,000/year. Your employer will automatically account for 70% of your N.I.S. and 100% of your company pension plan contributions when calculating your income tax so the reduced tax would be reflected in your monthly payslip but if you have an individual pension plan, it’s up to you to ensure that you get to enjoy the tax-reducing benefits.

Luckily, in Trinidad and Tobago, there are many deferred annuity plans available from a variety of financial institutions:

Insurance Companies

• Assuria Life's 'Annuity Plan'

• Guardian Life's 'Lifestyle Privilege Pension Plan'

• Maritime Life's 'TRIflex Individual Gold Plan'

• Sagicor Life's 'Tax Secure Annuity Plan (TSAP)' 

• Scotia Life's 'Scotia Platinum'

• TATIL Life's 'Destiny'

Commercial Banks

• First Citizens Bank's 'Tax Advantage Plus (TAP)'

• RBC Bank's 'Individual FutureCash Plan' 

• Republic Wealth Management's 'Tax Incentive Savings Plan (TISP)'

Investment Companies 

• Bourse Securities' 'Savinvest Individual Retirement Fund'

• Sheppard Securities' 'Pelagic Tax-Deferred Investment Plan (TIP)'

• Unit Trust Corporation's 'Penson Plus'

They are essentially similar in structure and design. You choose the age between 50 and 70 that you expect to retire or would like the plan to mature and indicate the amount that you intend to contribute towards the plan every year until you get to that age. You will earn interest on your contributions periodically so your savings will grow over time. It is a contract with a financial commitment and the BIR will issue a participating certificate to you. Once the plan is active, you can make your monthly contributions as planned and can even make one-time lumpsum contributions. Some institutions may even allow you to stop making payments without it affecting the status of the plan.

Enjoying Benefits Sooner

Every year, you would receive an annual contribution statement that confirms the contributions that you made the previous year and indicates how much contributions are expected to be made in the current year. If you would like to claim your tax deduction (it is optional), you would need to submit it when filing your annual tax return so you can receive your tax refund for the previous year's contributions. You can also submit the statement to BIR, along with your TD1, for approval of your expected contributions at the beginning of every  year. The BIR will advise your employer on how much tax deductions you are approved for so less tax would be withheld from your monthly salary. If you get your tax deductions approved in advance, you won’t need to file your tax return to get your tax refund since you would have already paid less tax. What you do with the money you've saved from paying less income tax is completely up to you. You can spend, save, invest or donate it if you wish.

Withdrawals and Refunds  

This is a form of forced savings so you will not be able to make any withdrawals before maturity which is very restrictive. However, if you do decide to claim your tax deductions every year, you can sort of think of the tax refunds as withdrawals. The only way to get access to your funds before maturity is to cancel the plan altogether but that attracts certain penalties. If you cancel within the first 5 years, you would have to pay a $500 fee. However, regardless of when you cancel, 25% of the value of your savings will be deducted and sent to BIR before the remaining amount is refunded to you. You will have to pay this tax even if you never took advantage of the tax deduction (so you might as well do it). 

Still Enjoying Benefits Later

Once the plan matures at the age you had selected, you will have 2 options: 

1. Use the total value of all of your contributions plus all of the interest earned, minus 25% tax, to purchase an immediate annuity which will give you a monthly pension for the rest of your life  

2. Take 25% of your contributions plus all of the interest earned as a tax-free lumpsum. After paying 25% tax on the remaining 75% of your contributions, you can purchase an immediate annuity which will give you a reduced monthly pension for the rest of your life 

   
   

Unlike all of the options, this one does not result in a large nest-egg that you would have to use quite conservatively for it to last. Instead, it offers you a much needed lifeline in the face of an uncertain future; a recurring financial resource. The immediate annuity can typically be purchased from a life insurance company and will give you a guaranteed monthly income for the rest of your life. You cannot predict what that monthly income would be though because it is based on a variety of factors including the total amount being used to purchase it and your life expectancy. If the insurance company believes that you are likely to live for a long time after retirement, they will offer you a lower monthly payout since they are anticipating that they will be making payments over a longer period to you. Most will add a guaranteed payout period e.g. 10 years, so if you pass away during that period, your pension would be paid to your beneficiary until the end of the guaranteed period. So, you can rest assured that someone would still be able to benefit from your years of sacrifice if you aren't able to.