COLUMN-Grasping that break through pension plans
Tender-hearted, stroke a nettle,
And it stings you for your pains;
Grasp it like a man of mettle,
And it soft as silk remains.
–– Aaron Hill
Governments all over the world encourage their citizens and businesses to set aside funds for retirement. Up to the end of the 20th century in Barbados, however, this encouragement had not manifested itself in any legally comprehensive way.
Businesses that provided pension benefits for their owners and workers did so to capitalize on the tax opportunities granted them under the Income Tax Act. These businesses enjoyed similar tax concessions, but the amount of, and access to benefits under their individual pension plans varied significantly.
In 2003, the Owen Arthur administration passed the historic Occupational Pension Benefits Act (OPBA). Under OPBA, every pension plan established in Barbados now has to satisfy and uphold minimum required standards in order to enjoy a qualified tax status. Additionally, some officers and entities associated with the establishment, maintenance, and operations of pension plans have been assigned the role of fiduciaries, and must be guided by the “prudent man” rule when performing tasks or conducting business related to pension plans.
OPBA was passed in 2003, but the regulations related to the operations of the act had to wait for almost another ten years before being finally issued by the Freundel Stuart administration.
Today, in Barbados, the legislative framework related to the purpose, establishment and operations of pension plans is now fully in place. Going forward, a concerted effort has to be made to educate owners of businesses about the nature and magnitude of the concessions which are being offered to them by the Government of Barbados under OPBA. This article represents the starting point in that process.
To give the reader a simple introductory insight into the financial benefits of setting up a pension plan in Barbados, let us take a look at a Barbadian company that has made an annual profit of $200,000 before taxation. Assuming a corporate tax rate of 25 per cent, the company’s tax bill is now $50,000.
Thanks to the tax benefits provided under OPBA, the owner of that company can now consider setting up a pension plan to benefit himself, his family, and employees. Using the expertise of a pension actuary and aided by employee demographics, the company might now be able to make $200,000 in contributions to fund the pension plan. The payment of $200,000 in contributions to the pension plan would now reduce the company profits to zero and save the company $50,000 in corporate taxes.
Next year, and the years after that, the company might be able to contribute another $200,000 or more, based on the recommendations of the pension actuary.
The $200,000 contributed to the pension trust this year, and all other contributions made in future years will end up being invested. All of the investment income earned within the pension trust will accumulate tax-free.
Another benefit derived from pension plans comes from the fact that no creditor can make a claim against pension funds.
Given the state and nature of the Barbadian economy at this time, many readers will instinctively ask themselves: “Is the Government crazy? How can it be giving tax concessions to pension plans when it needs to be collecting more revenue to reduce the fiscal deficit?”
Any Government that provides tax concessions to pension plans does so out of enlightened self-interest. There are many national economic, social, and financial benefits that flow as a direct result of the existence of pension plans.
One, the contributions made to pension plans are routinely invested by fund managers. The flow of these pension funds into the financial market boosts the investment level of the economy and ultimately increases our national GDP.
Two, proper and efficient administration of pension plans requires the use of skilled and relatively scarce human resources –– pension actuaries, actuarial analysts, financial analysts, accountants, lawyers, benefits administrators, investment managers, investment analysts, and regulators. Fully developing the pensions industry in Barbados is an objective that will create permanent, sustainable well paying jobs for educated Barbadians. These jobs will lower the unemployment rate, create more contributions for the NIS, and increase the level of income taxes collected by the Government.
Three, many workers in Barbados are unable to save and therefore have to rely on the NIS as their only source of post-retirement income. The establishment of a pension plan serves to reduce workers’ total dependence on the NIS, and to ensure that business owners enjoy their desired standard of living after retirement.
Furthermore, it serves also to reduce the number of Barbadians who will have to depend solely on welfare benefits and other Government handouts in their old age.
The tax concessions provided under OPBA can now be grasped by any individual, or business making a sizeable income and having a desire to legally minimize the amount of taxes being currently paid to the Government. Doctors, lawyers, dentists, engineers, accountants, architects, contractors, consultants, computer specialists and all other self-employed persons, beauty salons, supermarkets, restaurants, construction companies, manufacturers and small businesses can now skilfully reduce their taxes by setting aside sizeable amounts of funds for post-retirement years.
Self-employed persons and businesses interested in further understanding how to grasp the opportunities provided by setting up pension plans in Barbados may feel free to contact me at email@example.com.
(Walter Blackman is a fully qualified, United States-trained pension actuary.)