How will the pension reform affect you?

With the approval in Parliament of the amendments to the Social Security Act, we now know the details of the first phase of the Pension Reform process. Changes to the State Pension (First Pillar) will be effective from January 1, 2007, but won't really start to affect people retiring until 2014.

Proposed implementation of Second and Third Pillar pensions has been put on hold until the first review of legislation takes place, which must be sometime before December 31, 2010 ('when' we do not know).

The current changes will affect everyone aged 55 or under in 2007 and can be broken down into three main categories:

• retirement age;

• contribution period; and

• pensionable income.

Retirement age

If you are 56 or over in 2007 then your retirement age will remain the same (61 for males and 60 for females - although females will be given the option to continue working to age 61 if they want).

If you are 45 or under in 2007 your retirement age will be 65. For those in between these ages there is a sliding scale:

If you are aged 55 or under in 2007, you will still be able to access benefits from age 61 if you stop working and meet the eligibility conditions on contributions below.

Contribution period

If you are 56 or over in 2007, then you are eligible for the full two-thirds pension if you paid a yearly average of 50 contributions for 30 years (no change to the rules).

If you are aged 45 or under you must make 40 years' contributions, with those aged 46 to 55 requiring 35 years' contributions.

If your yearly average number of contributions is less than 50, then your benefits are reduced proportionately.

Pensionable income

Two important changes are introduced here, regarding how your income is calculated and the maximum you are allowed to include.

The maximum pensionable income is set to increase. For those aged over 45 the ceiling of Lm6,958 will increase in line with the cost of living (to a maximum of Lm7,500 for those aged 56 and over, and a maximum of Lm9,000 for those aged between 46 and 55).

For those aged 45 and under the ceiling of Lm9,000 will increase from 2014 in line with 30% being the cost of living and 70% wage increases.

The way your final income for pension purposes is calculated at the moment is the average of the best three consecutive years in the last 10 (for employed people). This will remain the same for those aged 46 and over next year.

However, for everyone else the calculation will change to an average of the best 10 years in the last 40. This calculation will typically lead to a reduction in pension benefits since an average of the best 10 will always be lower than an average of the best 3, and typically the best years earnings are in the 10 years prior to retirement.

Other confirmed changes affecting those aged 45 and under include a new Guaranteed National Minimum Income, which provides a safety net level of income for all in retirement, and changes to the way pensions increase once in payment (to be fixed at 70% of wage increases and 30% of inflation).

As explained in previous articles, retirement planning is all about determining what you consider to be an adequate income in your retirement and ensuring that your level of savings and investment strategies are appropriate to meet your goals.

In future articles we will look at how best to save for retirement and what investment strategies are appropriate for long-term planning.

State pension changes at a glance

If you have a pensions-related question please e-mail us at pensions@middlesea.com Mr Fairbairn is a pensions consultant with Middlesea Valletta Life Assurance Company Ltd, which is authorised to carry on long-term business under the Insurance Business Act, 1998 and is licensed to provide investment services in terms of the Investment Services Act, 1994 in relation to linked long-term contracts of insurance.