Kedian Francis, Legal Commentator

The changes include allowances in respect of lump sum payments, the maximum pensions payable, and the addition of provisions that enable self-employed persons and those in non-pensionable employment to effectively provide for their retirement under approved retirement schemes.

NEW DEFINITIONS

Definitions, previously not provided under the old Income Tax Act have now been added for the terms deferred pensioner, participant, remuneration and spouse.

A deferred pensioner is a member of a fund or scheme who is no longer active, but is to receive a pension in the future.

A participant is either: an active member of a fund or scheme, a deferred pensioner or a pensioner of a superannuation fund or retirement scheme.

Even more interesting is the definition for remuneration which, by these amendments, now includes: salaries or wages, fees, commissions, and allowances.

In the past there have been numerous discussions among employers and employees regarding the categories of income that should be correctly included in the term 'remuneration'. The definition introduced by the amendments should now quiet that debate.

Additionally, the definition of spouse has been widened to include a single man or woman who has lived with a single woman or man, respectively, for a period not less than five years immediately preceding the date of his/her death.

It is also notable that definitions for the terms 'approved retirement schemes' and 'approved superannuation funds' have been extended to include a requirementthat the scheme or fund be registered under the Pensions Act.

SELF-EMPLOYED PERSONS

One of the major objectives of the amendments to the Income Tax Act was to improve the extent to which self-employed persons can contribute to pension funds and retirement schemes, thereby making more effective financial arrangements for their old age.

A self-employed person may now receive the same tax incentives on contributions of up to 20 per cent of their income as do employed persons.

Prior to the amendment, the maximum annual contribution allowable as a deductible expense to a person's retirement plan was limited to $6,000.

Whereas in the past a self-employed individual who earned $50,000 per month was only entitled to have a maximum of $6,000 treated as a tax-free deductible, that same person may now have a maximum of 20 per cent or $10,000 of his/her salary treated as a tax free deductible.

EMPLOYED PERSONS

As far as employed persons are concerned, the amendments provide that the maximum annual contribution in respect of a superannuation fund shall not exceed 20 per cent of the employee's remuneration.

This is made up of a maximum contribution of 10 per cent of the employee's remuneration and 10 per cent by the employer, up from five per cent under the old act. Where the employer contributes less than 10 per cent, the employee may contribute the difference, if that employee wishes to increase his or her pension benefit in the future. This was not previously allowed under the old act.

Therefore, if a person is earning $50,000 per month and the employer contributes six per cent, if the individual wishes to bolster his pension benefit on retirement, he may, under the amended legislation, make his own 10 per cent contribution plus the remaining four per cent shortfall in the employer's contribution.

However, an employee will not be able to make these additional contributions until certain amendments are made to the Pensions Act, 2004.

ENHANCED LIMITS ON BENEFITS

The new act, like the old, provides strict limits on the amount of lump sum payments that may be remitted to contributors of pension funds.

By virtue of the amendments, lump sums should not exceed the commuted value of a quarter of the accrued pension up to a maximum of 12 times a quarter of the annual pension before commutation.

The position differs from the old law in that there is no longer a cap of $120,000 on the lump sum payable on retirement.

Basically, 'commuted value' means the actuarially determined present value of a future benefit.

The cap has also been removed on the lump sum payable as retiring benefits to any contributor on retirement, pursuant to an approved retirement scheme.

Previously this amount was limited to $150,000.

The implication of this amendment is that a retiree whose annual pension is valued at, say $2 million, would under the old act receive a maximum lump sum payment of $120,000 tax free if he/she was a member of a pension fund, and a maximum tax free lump sum of $150,000 if a member of an approved retirement scheme.

Under the amendments, that same member could now potentially receive a maximum of 12 times a quarter of that $2 million as a tax free lump sum - that is, $6 million.

Annuities restricted

Pensions and annuities are now restricted to no more than 75 per cent of the remuneration of an employee at the date of retirement after 37.5 years of service or on that employee becoming incapacitated at an earlier age; or a proportionate percentage in respect of a shorter period of service.

This amendment is particularly interesting as this provision is entirely different from the old act.

Under the old law, for example, Pensioner A who was working for less than the specified maximum years of service, whether incapacitated or not, would not qualify for the maximum pension or annuity, which was determined by way of the following formula:

(Total years of service/maximum years of service) x 2/3 of remuneration at the date of retirement.

Under the new provision, Pensioner A would be entitled to a pension or annuity which was the equivalent of 75 per cent of his remuneration at the date of retirement, provided that he had given 37.5 years or more of service to his employer.

Interesting

What is particularly interesting is that, under the new law, on a literal interpretation of the provision, Pensioner B, if proven to be incapacitated, is automatically entitled to the maximum 75 per cent of remuneration being earned by him at the date of retirement, notwithstanding the number of years he was employed prior to date of retirement.

It is unclear whether this was in fact the intention of Parliament but it certainly is the most logical interpretation on a proper construction of that particular amendment.

If this is in fact Parliament's intent, then this means that the amendments have now made greater provisions for persons who are deemed incapacitated at the time of retirement.

An employer may increase the post-retirement benefit of a pensioner but that increase may not exceed annual changes in the consumer price index, that is, increases should be kept in line with inflation rates.

However the amendment act is viewed, what is certain is that if interpreted in the manner lawmakers intended, it will successfully ensure that, on retirement, there is more in the pensioner's pocket, and particularly, that there is more in the pocket of the pensioner most in need of it.

Likewise, it will assist the Government and the country generally by ensuring that, on retirement, fewer self-employed persons will find themselves in a financial crisis due to the effects of devaluation and inflation and more pensioners will be able to retire in dignity and without anxiety about their future.

Kedian T. Francis is an associate in the firm DunnCox attorneys-at-law, Kingston.