Planning for your future financial cushion

Retirement planning is important for everyone regardless of education and wealth. No matter how young at heart we may feel, the truth is that one day we will have to leave the working world and start to enjoy our retirement. Life expectancy is constantly increasing, thanks to the advancement in healthcare and medical science. This means that our life in retirement is also becoming longer and therefore the need to build a financial cushion is now crucial.

At retirement, our employment income will be replaced by the state pension which is capped at a maximum. For us to be able to enjoy the same standard of living we will need additional income, or we will have to drawdown money from the savings we would have accumulated throughout the years. Individuals are generally faced by an unpleasant surprise when reaching retirement age, as it is only then when they realise that the state pension benefit is much lower than their income during employment.  Since the state pension is capped, the shortfall experienced by high income earners is much greater than for others.

Private pension plans were made available in Malta only recently, where individuals who choose to save into a pension plan may benefit from a tax credit of 25% on their contribution. These qualifying pension schemes were specifically introduced to provide an attractive tax incentive to encourage individuals to save for the future. As a matter of fact, the threshold for contributions made in 2021 was increased to €3,000 from €2,000 per year. The cost of saving €250 per month/ €3,000 per annum is essentially €2,250, because €750 will be credited to the individual’s tax bill the following year. These plans usually start from a minimum of €40 per month and being a long-term product, one should choose an amount that is affordable to continue to save until retirement date.

There are different types of personal pension plans which include ‘With-Profits’ or ‘Unit-Linked’. The main difference between the two is the investment element i.e., where the pension contributions are invested. ‘With-Profits’ plans have contributions pooled together with money from other policyholders and invested in the insurance Company’s with-profits fund. This fund is highly diversified and cautious and seeks to provide smooth and stable returns. ‘Unit-Linked’ plans provide a more adventurous approach where the contributions buy units in a selection of funds of the individual’s choice. Here the individual has more control and the return on investment depends on the performance of the funds to which the plan is linked. These plans usually have a higher risk/reward profile than with-profits.

Saving an affordable amount in a pension plan over a long period of time and staying invested to benefit from the power of compounding will help grow one’s wealth exponentially. The substantial pension pot may be accessed when the individual reaches the age of between 61 and 70 years, depending on the retirement date selected by the individual. On retirement date, the individual may take 30% of the pension pot as a tax-free lump sum and the remaining 70% will have to provide regular income, either in the form of an ‘Annuity’ or ‘Programmed Withdrawals’.

When you are young you are in the best position you will ever be in to start planning for your retirement. It might feel strange to think about retiring when you would have just started a career, however saving a little amount early can have a major impact on your savings in the future. As Albert Einstein once said ‘Compound Interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it!’

Jesmond Mizzi Financial Advisors Limited (C30176) is an enrolled Tied Insurance Intermediary under the Insurance Distribution Act, Cap 487 of the Laws of Malta for MAPFRE MSV Life p.l.c. (MMSV). MMSV (C-15722) is authorised under the Insurance Business Act, Cap 403 of the Laws of Malta.  Both entities are regulated by the Malta Financial Services Authority.

Tax treatment depends on the individual circumstances.  Tax legislation and the amount of rebate may change in the future.