ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: Is the pension scheme still the best and safest option for ensuring financial health after retirement?
– Douglas
FINANCIAL ADVISER: An approved pensioned arrangement is one that is sanctioned by the Government.
There are two types – a superannuation fund and a retirement scheme. The Financial Services Commission, FSC, is the government agency responsible for supervising and regulating the private pensions industry.
A superannuation fund is an approved pension arrangement set up by a company or association for its employees or members. It is also called a group pension plan.
A retirement scheme is an approved pension arrangement established to provide a pension for its members, being individuals who are not members of a superannuation fund – including self-employed persons.
Approved pension arrangements must have a board of trustees or a corporate trustee having responsibility to operate it according to its trust deed and rules in the best interest of the members and their beneficiaries.
Because all approved pension arrangements are established as trusts, they must have a trust deed, which is a contract between the sponsor and the trustees to manage them according to certain stated conditions. The rules expand on the contents of the trust deed and also introduce new items.
Members make a required, or basic, or mandatory contribution, which is a stated percentage of their taxable salary, to the approved arrangement but may also make a voluntary, or optional, contribution, which is also a percentage of taxable salary to the superannuation fund or retirement scheme.
Plan types
There are two well-known types of pension plans – a defined contribution, or money purchase, plan and a defined benefit plan. The required contribution rate of each member is defined, and the contribution is put into an account to be invested. Similarly, the contribution of the employer is put into an account to be invested.
The returns on the funds in each account may or may not be guaranteed. This makes it possible to invest the funds in instruments with the capacity to generate capital growth but which exposes the funds to more risk.
At normal retirement age (or earlier termination) the member will receive a pension determined by the value of all the accounts: the member’s basic and voluntary contributions and the employer’s contributions, each of which will have a specific value. An actuary generally determines the amount of monthly pension the funds can buy for the member depending on the option chosen.
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