Much has been said about the current problems and issues in relation to the Maltese pension system. The public (first-pillar) pension system which we ‘contribute’ into by paying social security contributions has been criticised by all and sundry as being insufficient to provide a decent pension for any retiree. Indeed, due to the scarce finances of Malta’s ‘pension pot’, there are serious doubts as to the sustainability of the public pension system going forward.
Unfortunately, demography is working against us, since the Maltese population is ageing gradually with a low birth rate and longer life expectancy. This shouldn’t come as a surprise to many, as the EU institutions have been pressuring past governments for the introduction of some form of pension system which seeks to guarantee that Maltese nationals have decent retirement benefits once they retire. Moreover, further pressure from the EU may be imminent should the European Commission decide to proceed with the harmonisation of ‘third-pillar’ pensions throughout the EU.
It is therefore comforting to hear that the present Government has publicly pledged that it will encourage the introduction of ‘third-pillar’ pensions through the implementation of various tax and fiscal incentives in the forthcoming Budget, possibly without creating additional burdens.
The introduction of a third-pillar system in Malta should be a step in the right direction, as it should encourage Maltese residents to start saving for their future. Since a ‘third-pillar’ pension is a privately funded pension scheme where contributions are voluntarily made by private individual contributors, one of the principle ways of attracting such contributions to be placed into such schemes would be the introduction of favourable tax deductions or exemptions. Some social partners in fact go all the way to state that without such incentives no one would even consider third-pillar pensions as a possible solution.
It will come as no surprise therefore, that the principal obstacle for the participation by Maltese residents in third-pillar schemes is the current taxation and fiscal system, which does not fall short of deterring any potential contributor from thinking about third-pillar pensions as a solution to the scarcity of retirement income. Indeed, there is currently no tax relief whatsoever in relation to any contributions made by a contributor to a pension scheme. This means that one can only contribute taxed or net monies into a pension scheme.
Unfortunately, demography is working against us, since the Maltese population is ageing gradually with a low birth rate and longer life expectancy
To add insult to injury, there are also no exemptions or relief for pension monies once the member of a pension scheme starts receiving his pension benefits at retirement age. This results in multiple taxation for Maltese tax residents’ pensions, since both the contributions made to the pension as well as the benefits paid out by the pension scheme are taxed in terms of Maltese tax laws. Most of us would in fact be quite surprised to realise that once we retire and begin to receive pension benefits from the Maltese public pension we are taxed on this pension, as if it was normal trading or employment income, earned during the fiscal year in question.
Therefore, what would the correct recipe be for third-pillar pensions to be a success story in Malta? One should begin by looking overseas into countries (possibly other EU states) where third- pillar pensions have been operating and have been providing supplementary pensions to private persons for decades. Various models can be emulated of course but the common principle applied by most pension tax systems is that there is tax relief on either the contributions made or low tax rates on the eventual withdrawals from such schemes.
These models have been tried and tested in other systems such as the United Kingdom where in terms of the Finance Act 2004, the contributions made by the individual to the scheme (up to a maximum cap of around £44,000 set by the UK Government) are exempt from tax, since in principle, tax is levied on pension withdrawals rather than on contributions.
While the form of relief or deduction may vary (whether in the form of a fixed amount of contributions per annum or fixed percentage of the amount contributed), in light of the current economic situation, it is submitted that it may be more appropriate for the Government to provide for relief or taxation which would create an immediate attraction for those contributing (such as an amount per annum which would be a deductible from ones taxed income), while at the same time reducing any tax loss to a minimum by leaning more on lesser tax rates linked with the profits and draw-downs from the scheme, so as to lessen the tax burden on the member of the scheme, once that member is indeed a pensioner.
The common denominator of other private pension tax systems is that where tax is due on the payment of retirement benefits, then such tax is limited to either taxation of any profits or gains made by the individual’s pension (usually at reduced tax rates), or to taxation on the proportion of draw-downs equal to the initial contributions which benefited from a tax deduction at the time the contribution was made. It is also worth mentioning that since certain financial services products (such as annuities) amounting to over €187 million will mature by the end of 2014, then this presents a good opportunity for the Government to introduce tax incentives which ensure that no tax is suffered should those persons investing in such products wish to convert these products into ‘locked’ private pensions.
Fortunately, the regulatory and legal framework for third-pillar pension structures in Malta is already present, as Malta has a vibrant and growing pension scheme industry with a considerable number of retirement schemes and retirement scheme administrators licensed and regulated by the MFSA. Indeed the MFSA should shortly be issuing the new Pensions Rules which are bound to update and improve upon the current retirement directives.
By taking advantage of the introduction of tax incentives, the increase in contributions to third- pillar pensions should also lead to the creation of many jobs in the local financial services industry and should present local graduates and other local support staff with several employment opportunities in the near future. Moreover, the establishment of new third-pillar schemes may result in substantial contributions which may be readily available to be ‘conservatively’ invested in local and EU government corporate bonds and other similar instruments in order for the Maltese Government to have an alternative source of funding.
Therefore, with the correct recipe in place the introduction of a third-pillar scheme for Maltese residents should ultimately benefit Maltese residents wanting to improve their retirement income, the financial services industry and possibly, even the Government itself.
mbrincat@ganadoadvocates.com
Matthew Brincat, senior associate, and Beppe Sammut, advocate, form part of Ganado Advocate’s Insurance and Pensions Team.