Two frequently asked questions are: why is it so important to save for retirement and not depend wholly on state pensions? And why should there be a shift from state pensions to Private Pension Plans (PPPs)?
This article seeks to answer these questions in the light of environmental forces affecting the local socio-economic environment.
Statistics speak louder than words
The reasons for the introduction of PPP in 2015 is that Malta has an ageing population and this phenomenon is not solely confined to the local scenario but is taking place on a worldwide scale.
“Population aging is one of the greatest challenges of our times. The continuing and marked reduction in fertility rates, together with the increase in life expectancy, outlines a process of demographic transition that will undoubtedly constitute one of the landmarks in the history of humankind,” said Antonio Huertas Mejias, chairman and CEO of Mapfre.
Malta also has the lowest birth rate in €pe. People are living longer and if they retire at 65, the probability (on average) is that they live up to 83 years, which is the estimated life expectancy in Malta. Also, since governments are increasingly getting lower on funds to pay for pensions, there is a probability that the retirement age will be increased, to say 67, given that people are living longer.
Since the birth rate is low, another socio-economic indicator that requires careful consideration is the fact that the Maltese native population is slowly “dying out” (decreasing). Paradoxically, the population as a whole is increasing and now stands at 600,000. But this increase is due to the influx of foreign workers, which is estimated at 150,000.
Moreover 25% of the local native population is aged between 65-83. Hence, most of our taxes, which go to fund the needs of the elderly, are being sourced from a working population that is low. Although foreign workers are a source of government revenue, this revenue comes mainly from high-end jobs in the service industry. Also, these workers come and go and hence are not a stable source of government revenue. This also impacts adversely tax and national contributions revenue for allocation to government state pensions.
Another factor that is acting as a blow to state revenue is corporate taxation. In order to stimulate foreign investment, the government taxes foreign investment at 5%, while Maltese businesses pay 35% by way of tax.
As a result of the above factors, the government urgently needs revenue by way of national insurance contributions from both sets of the gainfully employed population (employees and self-employed), since this revenue, derived from national insurance, goes mainly to pensions, health care and social benefits.
Foreign jurisdictions have been attacking this pensions problem but Malta is still lagging some 11 years behind other countries with regard to PPPs. And the clock is ticking fast, as it is estimated that in four years’ time, the need for a PPP, for both employees and self-employed, will be a must.
Private Pension Plan or Schemes (PPPs)
The basic rules for PPPs are:
• Age at entry – 18 years
• Need to be domiciled and/or resident for tax purposes in Malta
• Benefits payable anytime between 61 years to 70 years
• Minimum duration of plan, (may depend on provider), 10 years
• When plan finishes, a person must be 70 years old
The maximum pensionable income in Malta stands at €27,853 yearly and on retirement one gets a pension of two-thirds of that income. Obviously one would have paid all the national insurance contributions to be eligible.
To illustrate the working of the PPP, let us consider a simple example of a 35-year-old earning a yearly salary of €40,000 and with the current legal retirement age of 65. If this person, hypotetically retires at age 35, the gap between his salary of €40,000 and two-thirds pension of €27,853 will be €12,147. Now consider this person working up to age 62 and has a salary of €60,000. Now the gap between his salary and his pension will be even bigger. A person who retires with a pension of two-thirds of €27,853 will not have the same lifestyle he was accustomed to when he was with a yearly income of €60,000. And since, we humans are creatures of habit, this drop in income would be devastating on him/her.
From an income of €60,000 (or €5,000 per month), the person would have an average pension of €1,300 per month! One has to consider also the rate of inflation, which now stands at 4.9%. There are also environmental factors beyond the country’s control which push up prices such as pandemics and the wars in Ukraine and Israel.
When it comes to women, unfortunately, they suffer a lot more and hence need to be more careful to have a pension plan to secure income when they retire.
Recommendations
Given the above situation, a person must be wise enough to plan for his/her future and invest and save emergency funds. It is not wise to save in savings accounts which give a meagre interest but to put your money in such institutions where interest is at least 3%. One has to ask if the interest is simple or compounded and the limit your investment is protected by reading any disclaimer clauses. Banks in Malta guarantee investments up to €100,000. Saving money for a rainy day is not enough. Planning for a PPP is now becoming ever more important.
PPP incentives
The government is fully aware that a maximum pensionable income in Malta of €27,853 yearly is small. So, government came out with the idea of creating an incentive to take on PPPs by giving a tax rebate of 25% to stimulate the gainfully employed to take on private pension plans. One can start investing in a PPP, at a very small monthly investment of €25 or even at €40, which is quite affordable.
The earlier in life one starts investing in a PPP and the more money invested per month, the higher is the pension on retirement. It would be advisable to start a PPP at 18 years of age rather than 40 years of age. An amount of €40 per month amounts to €1.43 daily, which is practically the price of a coffee. So, €40 x 12 months = €480 with the government giving back 25% rebate.
If an employee can afford to invest €100 per month and start at an early age for the sake of the argument, the tax rebate can be invested. Ultimately, it all depends on the peron’s budget as to what minimum premium you want to invest in your pension plan per month. The amount invested in PPPs is guaranteed by government up to €23,000. In taking a PPP, one has also to check on the charges and these depend on the company offering the PPP.
Since the PPP legislation was introduced in 2015 in Malta, it is still a fairly new concept. The law allows you to access money when reaching the age of between 61-70 and before this age group when the employee suffers a permanent disability. PPP in Malta is regulated by two bodies – the government and the MFSA.
Two types of PPP
There are two types of PPPs – Unit Linked and With Profits.
Unit Linked: With a Unit Linked investment, you are completely open to market conditions as your investment value is directly linked to the value of the funds underlying it. Unit Linked invests your monthly contributions in a fund divided into units. The value of the units depends on the performance of the underlying investments, such as bonds and shares. It is therefore important that the interest covers inflation otherwise the investor will lose.
With Profits: A With Profits investment, however, builds a guaranteed value over its term. The returns are lower, but the capital is guaranteed. In order that people do not end in poverty as the government will not have enough revenue to pay for pensions, the shift is from state pension to PPPs.
Apart from sustainability, PPPs are considered as a win-win situation for the stakeholders. The government will be gradually released of its heavy burden to pay pensions. The private sector, offering the PPPs, will invest the money locally or abroad to make profits and pay the pension. The pensioner is assured of a pension income that is in line with the lifestyle prior to his/her retirement. The country will also help persons falling into poverty.