Ce­cila Melville

Sev­er­al pen­sion prod­ucts are sold in the Trinidad and To­ba­go mar­ket, but all pen­sion prod­ucts are not equal. All pen­sion prod­ucts do not have the same risks or pro­vide the same ben­e­fits!

De­ferred an­nu­ity prod­ucts and re­tire­ment funds al­low for re­tire­ment plan­ning and the man­age­ment of tax li­a­bil­i­ty. Where the pen­sion prod­uct is ap­proved by the Board of In­land Rev­enue, the per­son may ben­e­fit an­nu­al­ly from a tax cred­it on their con­tri­bu­tions up to a max­i­mum of $60,000. This lim­it in­cludes pay­ments to ap­proved pen­sion funds, an­nu­ity plans and 70 per cent of the con­tri­bu­tions to the Na­tion­al In­sur­ance Sys­tem.

The ma­tu­ri­ty age for pen­sion prod­ucts may be set at a min­i­mum age of 50 years to a max­i­mum of 70 years.

Ear­ly with­drawals at­tract heavy penal­ties but may be al­lowed un­der cer­tain stip­u­lat­ed con­di­tions, with the ap­proval of the Board of In­land Rev­enue.

A com­par­i­son of the de­ferred tax an­nu­ity prod­ucts and oth­er re­tire­ment funds re­veals some pit­falls one must be aware of and take steps to avoid.

De­ferred an­nu­ities may in­clude ad­min­is­tra­tive and in­vest­ment man­age­ment ex­pens­es, tax­es and oth­er ex­pens­es.

In ad­di­tion, de­ferred an­nu­ity con­tracts typ­i­cal­ly in­clude high­er fees than re­tire­ment funds, some of which may not be ful­ly dis­closed.

For ex­am­ple, one in­sur­ance com­pa­ny im­pos­es a five per cent charge on a lump sum pay­ment made in ad­di­tion to planned pre­mi­ums even though the con­tract pro­vides for such a pay­ment to be made in or­der for clients to grow their re­tire­ment in­come to safe­guard their lifestyle.

Most im­por­tant­ly, in­for­ma­tion on the 5 per cent charge is not promi­nent­ly dis­closed to cus­tomers when mak­ing pay­ments. This means that cus­tomers may be un­aware that they are pe­nalised every time they make ad­di­tion­al con­tri­bu­tions over the life of their an­nu­ity.

The com­pa­ny has pro­vid­ed no ra­tio­nale for the 5 per cent charge. Prospec­tive buy­ers and ex­ist­ing cus­tomers there­fore need to care­ful­ly read their con­tracts to iden­ti­fy all fees charged and to as­cer­tain how these ad­verse­ly im­pact their ac­cu­mu­lat­ed bal­ances. Clients al­so need to be dili­gent and per­sis­tent in seek­ing the rel­e­vant clar­i­fi­ca­tion about fees and ac­tions by the ser­vice provider.

Sec­ond­ly, some de­ferred an­nu­ities charge most of their ex­pens­es up­front. In some in­stances, as lit­tle as 20per cent of pre­mi­ums may be ap­plied to cus­tomers’ bal­ance in the first pol­i­cy year. In ad­di­tion, in­creas­es in the pre­mi­um con­tri­bu­tion may at­tract a hair­cut with as lit­tle as 45 per ent of any in­crease in pre­mi­um be­ing ap­plied to the cus­tomer’s bal­ance in the year the in­crease comes in­to ef­fect.

Fur­ther, some an­nu­ity providers seek to in­cen­tivise pol­i­cy­hold­ers by of­fer­ing a spe­cial pre­mi­um cred­it. This pre­mi­um is a ben­e­fit to the cus­tomer be­cause it re­sults in high­er con­tri­bu­tions and a high­er ac­cu­mu­lat­ed bal­ance, all things be­ing equal.

On the oth­er hand, the spe­cial pre­mi­um cred­it is a le­gal oblig­a­tion of the in­sur­ance com­pa­ny which must be met.

Con­se­quent­ly there is the need for greater trans­paren­cy in the ac­count­ing and re­port­ing of funds man­aged un­der the de­ferred an­nu­ity con­tracts in­clud­ing the pro­vi­sion of ev­i­dence of the pay­ment of the spe­cial pre­mi­um cred­its and their im­pact on pol­i­cy­hold­ers’ bal­ances.

Re­tire­ment funds, which are typ­i­cal­ly man­aged by mu­tu­al fund providers, ap­ply 100 per cent of con­tri­bu­tions to the cus­tomer’s ac­count from the date it is opened. They al­so of­fer greater flex­i­bil­i­ty as ac­count hold­ers are able to vary their con­tri­bu­tions through­out the life of the plan with­out any penal­ty.

In­for­ma­tion on re­tire­ment funds is read­i­ly avail­able and there ap­pears to be greater trans­paren­cy in the re­port­ing of the fi­nan­cial in­for­ma­tion on these funds.

How­ev­er, one of the down­sides of the re­tire­ment fund is that an an­nu­ity may have to be pur­chased in the mar­ket at an un­known rate where the ac­count hold­er opts to re­ceive a pen­sion at ma­tu­ri­ty.

In the case of a de­ferred an­nu­ity, the an­nu­ity rate is stat­ed at the time the con­sumer signs the con­tract.

In ad­di­tion, the con­tract may stip­u­late a guar­an­teed pe­ri­od for the pay­ment of the pen­sion thus pro­vid­ing the cus­tomer with greater cer­tain­ty about one’s re­tire­ment in­come.

Ul­ti­mate­ly con­sumers must care­ful­ly weigh the ben­e­fits and risks of each prod­uct be­fore pur­chase and must re­main vig­i­lant to en­sure that their rights are pro­tect­ed.

A key fac­tor in as­sist­ing cus­tomers in mon­i­tor­ing the per­for­mance of these prod­ucts is the avail­abil­i­ty of rel­e­vant and ac­cu­rate in­for­ma­tion.

With re­gard to de­ferred an­nu­ities, one en­coun­ters the prover­bial black box when try­ing to se­cure in­for­ma­tion on the val­u­a­tion of the un­der­ly­ing as­sets and by ex­ten­sion the es­ti­mat­ed val­ue of one’s pen­sion ben­e­fits.

The chal­lenges en­coun­tered sug­gest that more ro­bust fi­nan­cial con­sumer pro­tec­tion laws are need­ed to pro­mote trans­paren­cy and ac­count­abil­i­ty by fi­nan­cial in­sti­tu­tions that sell these prod­ucts.

In ad­di­tion, the le­gal and reg­u­la­to­ry frame­work should be brought in­to align­ment with in­ter­na­tion­al stan­dards to en­sure that con­sumers know their rights and that fi­nan­cial in­sti­tu­tions dis­charge their re­spon­si­bil­i­ties.