Our happiness and well-being in retirement depend on how well we plan for it. Have you ever wondered if the state pension would be enough to sustain your current lifestyle?
Chances are, it probably won’t. That’s why it’s crucial to start saving for retirement as early as possible. It’s easy to let other priorities take precedence, but the earlier you start saving, the more likely you are to achieve your retirement goals. Whether you’re just beginning your career or are already well into it, planning for retirement is a crucial step towards achieving financial security.
One effective way to save for retirement is through unit-linked, long-term insurance contracts. These contracts allow you to convert your monthly contributions into units at an offer price, which fluctuates based on the market. It is important to note that while the price and value of these units may change, the number of units already bought remains constant.
Typically, such policies feature a dual pricing mechanism, meaning that units are purchased at one price, commonly known as the ‘offer’ price, and sold at another, known as the ‘bid’ price. The ‘bid’ price is typically lower than the ‘offer’ price.
When the market price is low, the value of your units will decrease, but you end up buying more units at a cheaper price with your monthly payments over that period, contributing to your retirement pot. Conversely, when the market is up, the value of your units increases, and you buy fewer units during that period. This concept is known as euro-cost averaging, a strategy that may work in your favour as it helps average your cost price for the units bought, over time.
As retirement approaches, it’s advisable to gradually reduce risk exposure to safeguard your savings
At retirement, the accumulated units are sold at the bid price at that time, generating regular programmed withdrawals along with an option for a lump sum.
In Malta, individuals saving for retirement through a personal or occupational “qualifying pension scheme” can benefit from a tax credit of up to €750 annually. Additionally, a tax-exempt lump sum of up to 30% of the policy value can be taken at retirement. To further encourage more people to save for their future, tax exemptions on pensionable income are also applicable.
While these unit-linked retirement schemes offer significant advantages, it is essential to be aware of associated charges. Policies may have bid/offer charges, annual management charges, policy fees and allocation rates, which can vary between providers. Some providers offer positive allocation rates, increasing the amount of your contribution that goes directly into your retirement savings, thereby boosting your investment.
It’s important to recognise that investing in unit-linked contracts carries certain risks due to market fluctuations. However, historical data suggests that over the long term, markets tend to outperform traditional savings instruments. While this potential for growth is attractive, it’s crucial to assess your risk tolerance before investing.
Conducting a risk profile assessment helps determine your personal comfort level with risk and your ability to bear potential losses. A financial adviser can assist in this process, guiding you to choose investments that are more suitable for you and that align with your risk tolerance and financial goals.
Additionally, age plays a significant role in determining the investment strategy. Generally, the more time you have until retirement, the greater your capacity to take on risk. As retirement approaches, it’s advisable to gradually reduce risk exposure to safeguard your savings. By understanding and managing these factors, you can navigate the complexities of investing in unit-linked contracts with confidence, helping to secure a more stable financial future.
Underlying investments within your retirement plan should be flexible and reflect your changing needs and goals. Life is unpredictable, and goals may evolve, so revisiting your plan regularly is crucial. Investing your retirement savings provides the potential for growth and having a well-thought-out investment strategy is key.
In conclusion, planning for retirement is an essential step towards a financially stable future. By understanding the benefits of unit-linked, long-term insurance contracts, taking advantage of tax credits and exemptions, and developing a robust investment strategy, you can pave the way for a comfortable and fulfilling retirement.
Josef Camilleri is head of products and distribution at HSBC Life Assurance (Malta) Ltd.