On Wednesday November 12, Prof Edward Scicluna launched the Third Pillar Pension scheme, encouraging low income earners to start saving for their retirement. Interestingly, a regulatory framework for ‘private’ pensions has been in place since 2002 under the Special Funds (Regulation) Act, supported by the retirement directives issued by the Malta Financial Services Authority (MFSA).
If one had to take a snapshot of the Maltese pensions industry so far, the statistics show that since 2009 the pensions market has grown to 13 retirement scheme administrators (RSA), with circa €1.1 billion assets under management. However this industry is mainly focused on managing foreign sourced monies by schemes which qualify as QROPS (Qualifiying Recognised Overseas Pension Schemes) in terms of UK legislation.
The introduction of the Third Pillar Pension schemes was therefore the next step in augmenting the Malta pension sector. The latter was launched by means of an amendment to the Income Tax and the Social Security acts which paved the way for new fiscal incentives aimed at encouraging Maltese residents, especially low income earners, to start saving for their pension by investing in private products which may be offered by local banks, life insurance companies, investment managers and financial institutions licensed to sell these products.
Therefore, any Malta taxpayer will be able to obtain a tax credit against income tax chargeable in Malta. This will be applicable on any contributions made by a person to any personal retirement scheme or premiums paid in respect of a qualifying policy of insurance.
The tax credit will be equal to the lower of 15 per cent of the aggregate of the contributions or premiums paid; and €150.
This means that, if a taxpayer falls within the 15 per cent income tax bracket, s/he can utilise €1,000 of his/her annual income to contribute to a personal retirement scheme or a qualifying insurance policy without paying tax on that €1,000 income. If, on the other hand, a taxpayer falls within the higher tax bracket or would want to contribute more than €1,000 every year in such scheme or policy, the maximum tax saving of the taxpayer would be €150. This tax credit will only be available in respect of qualifying schemes or policies of insurance as may be prescribed by the Commissioner for Inland Revenue.
Currently, only an authorised RSA licensed by the MFSA may administer a retirement pension scheme, which is also separately licensed in its own right. An RSA would therefore be responsible for the overall operation of a retirement scheme and carry out the day-to-day administration of that scheme for the benefit of a scheme member.
The launch of the fiscal incentives for third pillar pension schemes is also expected to trigger the ‘coming into force’ of the Retirement Pensions Act of 2011. The latter will update the current legal framework in order for Malta to have specific legislation on private pension schemes and will enable the MFSA to introduce the updated Pension Rules by the end of 2014.
It is also worth noting that the Pension Rules should also consolidate the current withdrawal or ‘drawdown’ rules in order to ensure that scheme members receive ‘sufficient income’ throughout their retirement. These rules should also provide further clarity as to the role of certain service providers linked to pension schemes, including clarity on the roles of asset managers, back office administrators, custodians, auditors and financial advisors, who should all be geared towards providing pension scheme members with retirement income to supplement their government pension.
Dr Brincat, a Senior Associate of GANADO Advocates, leads the Private Pensions team of GANADO Advocates and is also the General Secretary of the Malta Association of Retirement Scheme Practitioners (MARSP) – mbrincat@ganadoadvocates.com