Working hard all your life and saving diligently into a pension plan means you will automatically enjoy a happy retirement, spending time doing the things you love, such as hobbies, sports or maybe travelling the globe.
Not necessarily, according to recent research in the UK by pension experts MGM Advantage. It found the average retired Brit feels they need an extra £140 a week (CI$180) or £7,300 a year (CI$9,550) to be financially comfortable. And remember, UK pensioners also receive state pension in addition to company and private pensions, which we do not receive here in the Cayman Islands.
Globally, pension funds are receiving a double blow – not only are people living longer and therefore needing more money on which to live, but the weakened economy has also taken its toll on the investment pot, reducing the final amount we will have available to us when we retire.
On average in the UK, a man will live for 17 years more after retiring at 65, while a woman will live for nearly another 20 years. Cayman’s mandatory retirement age is even earlier, at 60 for both men and women, expanding the years of retirement even further for Caymanians and stretching that pension fund even further.
UK insurance and savings company LV says that since 2000, UK pensioners have seen living costs rise by 33 per cent, with their biggest expenses of food and non-alcoholic drinks, which cost them around 14 per cent of their total annual spending, followed by utility bills and travel/petrol. We in Cayman are feeling the pinch when it comes to rising food and fuel costs and these statistics are a reminder that we all need to assess our pension contributions to ensure that we have saved enough to enjoy a fruitful retirement.
Thankfully there are some measures you can take to ensure that you are getting the best out of your pension to maximise your benefits in old age.
The first step is to work out how much you think you will need to live on in your retirement. Your pension provider can help you, along with online planners, but generally you will need to work out how much you are saving via a pension plan and any other savings plans, how much you will likely be spending in retirement and therefore how much money you will need. The difference between how much you are saving and how much you anticipate spending may surprise you, with a possible sizable shortfall.
There can be a number of reasons for this shortfall; one of the most significant being the length of time contributions have been going in. Since the Pensions Law in Cayman has only been in effect for 14 years, there will be many employees in the Islands who have worked for 20 or 30 years, but who have only been contributing over the past 14 years.
A second example of how this shortfall arises is in the case of workers who earn more than the legal cap amount of $60,000, but for whom the employer only contributes the required cap amount.
Finally, market returns will play a factor. In the current very-low interest rate environment of the past several years, as well as the 2008 financial crisis that drove down equities worldwide, we have all been facing an investment market headwind as well.
Making the right choice when it comes to a pension plan provider is crucial. According to The National Pensions Law, employers in Cayman can register their own pension plan with the National Pensions Office or participate in one of six certified multi-employer pension plans. While the choice of pension fund provider in Cayman may still be relatively narrow, there is still sufficient choice to give you the ability to be pro-active in this choice, or assist your company to assess the best choice for its employees as a whole.
The Cayman Islands Chamber of Commerce Pension Plan recommends looking at various criteria that you should be carefully considered when choosing a pension plan provider.
Returns are an obvious starting point but you should also take into consideration administration fees as well, as these may vary. In addition, you must consider how the fund is managed to ensure the highest level of professionalism and therefore protection of the assets of the fund.
We also suggest that you should also know if the fund conducts diligent risk management to ensure that there is a careful and rigorous selection of the fund’s investment managers.
In Cayman, by law, employees are not required to pay more than five per cent of their earnings into their pension plan and their employer may not contribute less than five per cent of that employee’s earnings into the plan. However, you can increase your payments into your pension plan with additional voluntary contributions.
Although people generally stick to contributing their minimum contributions it is definitely worth considering making AVCs. AVCs can boost your pension premiums to get you to a level where you are able to look forward to a comfortable and enjoyable retirement.