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Why defined contribution pension plans are better in the Cayman Islands

MARCH 30, 2020

In the current climate, pension planning is more important than ever. Rising living costs paired with increased life expectancy means bigger pension pots are needed to retire securely and comfortably.   

If you are working in Cayman’s private sector, you are automatically enrolled in a type of pension scheme known as a defined contribution pension plan. In this programme, both you and your employer make contributions based on your earnings.

Defined contribution plans are common in the United States and the rest of the world – but here’s why they are better in the Cayman Islands.

 

No restrictions on contributions

If you have ever wondered how much you should contribute to your pension fund, “as much as you can” is the standard advice.  

In the US, the amount you are allowed to put away is restricted and changes year by year. This year, employees will not be able to contribute more than US$19,500 out of their salary.

However, in the Cayman Islands there are no limits on how much you contribute to your pension plan, giving you full control over your retirement future.  

 

Early access without being penalised

Life is unpredictable, and there may be times when you need to partially or fully withdraw your pension to pay for the unexpected.  

With a few exceptions, if you are living in the US and wish to access your pension funds early, you will be subject to a 10% penalty charge in addition to income tax on your withdrawal.

Similarly, early pension access in the UK results in tax charges of up to 55%.

Here in Cayman, certain conditions allow you to “unlock” your pension early, with no penalties or repayment requirements if you are only accessing your additional voluntary contributions (AVCs). AVCs are contributions that are made in addition to your mandatory contributions. 

Accessing your mandatory contributions is a benefit made possible for Caymanians in certain circumstances. Repayment is required with an additional 1% contribution – a “fine” that goes straight back to your own pension fund.  

 

No tax deductions

If you are living in the US, you can choose to have your taxes deducted either:

  1. from the amount saved at the time you make a withdrawal, or
  2. at the time you make your contribution

In the UK, taxes are not deducted from pension contributions, however you will be subject to Income Tax when the time comes to withdraw it. How much you are taxed depends on which pension withdrawal option you decide on.  

The Cayman Islands is a tax-neutral jurisdiction, so deductions are never taken from your pension. The money you earned and saved is simply that – yours. ​See how the Cayman’s pension advantages stack up against the likes of the US and UK in the table below. And if you are interested in maximising your dollars in Cayman’s longest established pension plan, let’s talk.

 

Comparison of defined contribution pension plans

 

USA (401k)

UK

Cayman Islands (Privately Funded Pension Plan)

Contribution limits


For 2020, employees cannot contribute more than US$19,500 out of their salary.

 The maximum joint contribution by both employer and employee is $57,000 for 2020, or $63,500 for those aged 50 and older.


There are no limitations on how much you contribute to your pension.  


There are no limits on how much you contribute to your pension plan, although employers are only obligated to make contributions on your first CI$87,000 of income.

Early access penalties


With a few exceptions, withdrawing money before your retirement age results in a 10% early withdrawal penalty, in addition to income tax on the distribution.


Unless you meet specific conditions, early pension release is subject to substantial tax charges – up to 55% on the amount you withdraw.


There are no penalties or repayment requirements for early access of additional voluntary contributions (AVCs).

Accessing your mandatory contributions does require repayment with an additional 1% contribution on a monthly basis – so the “fine” gets paid back to you.   

Taxes deducted from pension

Taxes will be deducted either: a) from the amount saved at the time a member makes a withdrawal or b) at the time the member makes the contribution

Upon retirement, your pension withdrawal will be subject to Income Tax – the amount depends on which pension withdrawal option you make.

There are no tax deductions from your pension.

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