Both amendments are intended to pave the way for new fiscal incentives in order to encourage people to save for their pensions. It is quite obvious to all and sundry that the government’s two-thirds pension alone, which currently amounts to a maximum of approximately €12,000 a-year, is indicative that the first pillar or government pension will not be sufficient for retired people in the long run.
Bill 64 and 65 of 2014 are therefore aimed at creating a fiscal framework which should incentivise Maltese residents to start saving for their pension by investing in private products, also known as personal retirement schemes. This will create a system whereby a person’s government pension is supplemented by other regulated pension products which are aimed at providing those who invest in such schemes with an additional pension going forward.
The numbers behind the incentives are not complex in that any Malta tax payer 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
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. It should also be noted that 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. It is expected that more detailed regulations will be published in the future to identify the conditions for qualification.
The above figures are not expected to move mountains as they do not even come close to the fiscal incentives given in other EU countries. This notwithstanding, the incentives being put forward can easily become the backbone to a system whereby, at long last, contributions into a private pension scheme are, at least partially, untaxed.
So, will those who invest in property as a means of saving or those who dabble with investments suddenly surrender everything for the sake of these new incentives? Most probably not. The incentives proposed by the government will not provoke people to make such bold moves but they do, however, leave the door open for a new generation of savers who would like to place their hard-earned (perhaps untaxed) money into retirement schemes, guaranteeing a proper pension supplement in the future.
Contrary to public belief, the regulatory framework for such pension plans, has been in place since 2002 under the Special Funds (Regulation) Act and together with directive issued by the Malta Financial Services Authority aimed at assuring that pension monies are properly invested and administered. In fact, the investments made by such plans have to be conservative and retirement schemes can only borrow on a short-term basis in relation to the management of their assets. In addition, they should not engage in any leverage and that the assets of the retirement scheme need to be properly diversified in order to avoid accumulation of risk. Moreover, the government should shortly bring into force the new Retirement Pensions Act which is aimed at updating the current legal framework to specifically regulate personal pension schemes.
The Malta Financial Services Authority has already issued the new draft Pension Rules (which should replace the current retirement directives) in order to bolster the regulatory framework which the incentivised products might need to adhere to. Undoubtedly, these incentives will not change the way Maltese people save for their pensions overnight, but it might encourage employers to organise group personal plans and negotiate special contribution rates for their employees while possibly creating a culture of saving among young and middle-aged Maltese residents which till today is almost inexistent.