The maximum amount retirees can withdraw from their savings in a private sector pension plan each year will be increased as of early 2017, Employment Minister Tara Rivers announced this week.
Private sector retirees participating in a National Pensions Law-mandated retirement savings plan can currently withdraw a maximum of $12,000 per year, regardless of how much they have saved or their current age.
Under the new government policy, due to take effect Jan. 9, the minimum and maximum withdrawal amounts a pensioner can take each year will vary, based on age and savings.
For Retirement Savings Arrangements accounts that have smaller balances, $12,480 annually will be the maximum withdrawal, according to the ministry. This is to ensure “plan members have a basic pension amount that lasts for their entire retirement and that they do not use all of their pension funds before their anticipated death.”
Individuals who have more money in their retirement savings accounts can withdraw more. Also, the withdrawal amount can be adjusted for inflation in future years under the new scheme.
The schedule that will govern how much pensioners of a certain age and retirement savings can withdraw each year was provided to the Cayman Compass by ministry officials.
The table sets the rates at which retirees can withdraw from their pension accounts, starting at age 50 [if they have taken early retirement] and going up to age 102. For example, a person who retires at age 60 and has a suitable amount in their retirement savings account can withdraw a minimum of 1.97 percent from their account that year and a maximum of 4.73 percent, based on how much they have in the account.
For a person age 70, the minimum percentage is 2.18 of the savings account funds remaining and a maximum 5.68 percent of the funds remaining.
The percentages are taken from the total amount of cash the person has left in their savings account. The private sector retirement funds in Cayman all operate on a fixed sum or “defined contribution” account, which means that when the money runs out, no further payments can be received.
“Pensioners who have larger amounts in their account will be able to withdraw an increasing amount on a yearly basis above the proposed $12,480 [minimum] threshold, as well as have the option to withdraw a lump sum amount any time after age 90,” a ministry statement released Monday indicated.
The average life expectancy in Cayman is typically between 80 and 82 years.
“For those persons who have accumulated significant balances in their pensions account, this new schedule will now afford them the opportunity to make greater withdrawals to increase their quality of life as retirees,” Minister Rivers said. “For those who may not have accumulated sufficient funds to withdraw above the stated maximum annual threshold, the schedule now accounts for the need to adjust that figure upward … for inflation.”
Minister Rivers said the changes would allow many retirees to live more independently “in their golden years.”
A decade ago, the Mercer consulting firm warned government in an evaluation of the private sector retirement system that the amounts contributed by pension plan members were not enough to provide suitable income replacement in retirement.
The contribution rate for private sector employees – 5 percent of their salary matched by a 5 percent contribution from their employer – has not increased since then. However, the government recently increased the overall amount of pensionable earnings that are contributable each year from a maximum $60,000 annual salary to an $87,000 annual salary.
During a Legislative Assembly debate this year on changes to the National Pensions Law, North Side MLA Ezzard Miller raised the issue of adequate “income replacement” in retirement, given that maximum withdrawals from a defined contribution retirement fund each year was $12,000. He suggested that $1,000 a month would not serve as “income replacement” for someone earning $6,000 to $8,000 a month before retirement.
“This bill … is really nothing more than fancy window dressing. [It] will not, in any way whatsoever, improve the chances of a poor person … in this country ever earning a pension under the pensions law,” Mr. Miller said.