Mr. Talha - Smart Tax Savings

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Smart Tax Savings through
Voluntary Pension Schemes
Alhuda-CIBE Trainings
Avari Towers, Karachi
April 25, 2012
Outline
I.
The Need for Retirement Planning
II.
Voluntary Pension Schemes
III. How VPS Works
IV. Comparison between VPS & Provident Fund
2
I. The Need for Retirement Planning
The Need for Retirement Planning
Retirement” is a phase of life where one’s source of income ceases. While your
INCOME stops, your EXPENSES don’t !
A Pension is an income that one will NEED at retirement
While we may be compelled to think of “Retirement” as a tedious phase of our life – it is
in fact a stage marked by:
•Limited Income
•Dependency on children
•Sacrifices & hardships
•Difficulty in meeting expenses
•No enjoyment
Therefore, we must ‘Plan’ today for a healthy, happy
retirement tomorrow
4
Global Pension Statistics
Details
Global AuM
Estimated Global Pensions
USD $ 24 Trillion
Estimated Global Mutual Fund
USD $ 18.9 Trillion
Estimated Insurance Fund
USD $ 18.7 Trillion
Together with Sovereign Wealth Funds ,
Hedge Funds, PE Funds, Wealthy
Individuals’ Assets
USD $ 90 Trillion
5
Pension Alternatives in Pakistan
To date, private citizens of Pakistan have not had access to a pension
plan, which would enable them to plan for their retirement in a
methodical manner.
Provident funds cater to similar
needs but provide:
Private citizens primarily
depend on:
• Very low returns
• Lack transparency
• Lack of premature accessibility
(in most cases)
• Yield on property
• Interest on bank deposits/NSS
• Or alternatively depend on
their children for retirement
support
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II. Voluntary Pension Schemes
What are Voluntary Pension Schemes (VPS)?
• A very flexible savings cum investment plan
• Facilitates individuals to save systematically for their retirement
• Savings topped with investment returns
• Desired investment exposure to high yielding assets
• Special tax benefits
• After reaching retirement age, get monthly income from your accumulated investments
or withdraw a lump sum amount
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Meezan Tahaffuz Pension Fund
Benefits
A long term saving mechanism with
flexibility of varying exposure to
different asset classes
Fund Type: Open End Islamic Pension Fund
•
The objective of MTPF is to provide participants a
Shariah compliant saving mechanism where individuals
save during their work life so as to retain financial
security and comfort in terms of regular income stream
after retirement
•
As per Section 63 of the Income Tax
ordinance 2001, Tax saving available
on contributions up to 20% of the
taxable income
Fund Size as of Mar 31, 2012: PKR 600 Mn.
•
For an investor aged 41 or above, the
contribution limit will progressively
increase by 2% every year, up to 50%
of taxable income
•
Tax free returns on investment
•
Portability
•
Additional feature: Free of cost
Takaful protection for Natural Death,
Accidental Death, Permanent Total
Disability and Accidental Medical
Expenses
Sales Load: 3%
Launch Date: June 2007
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Key Features of MTPF
•
•
•
•
•
•
•
The Largest VPS in the market with the size of over Rs. 650 mn
Shariah compliant as per the guidelines of Shariah Supervisory Board
Flexibility of choosing asset allocation scheme of choice, which can be changed once a
year on the anniversary of the account
Periodic rebalancing by Al Meezan Investments will ensure that your asset allocation
remains within your desired limit
Participants of MTPF on attaining the age of retirement shall have the following
options:
 Withdraw up to 50% of amount(tax free) in their pension account;
 The remaining amount shall be used to either purchase an annuity from a life
insurance/takaful company or invest the amount in any approved Income Payment Plan
to receive a monthly amount till the age of 75 years.
Participants can choose retirement age between 60-70
Participants can withdraw before retirement also. However, tax rate for last three
consecutive years would apply on the redemption amount.
10
E E T Structure
•
MTPF based on E E T Structure
•
E: Exempt : Tax Rebate on annual contributions
•
E: Exempt : Tax Exemption on Profits earned in MTPF. All earnings of the Scheme are
Tax Free
•
T: Taxable : Upon retirement, you can withdraw 50% of accumulated amount tax free .
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Structure of VPS
50
%
Al Meezan
Investments
Meezan Tahaffuz
Pension Fund
Sales Load
upto 3%
Allocation Policy
Contribution
Equity Sub Fund
Debt Sub Fund
M.M Sub Fund
At
Retirement
(on/after 60)
Before
Retirement
Disability
Before
Retirement
50
%
Tax free
redemption
Income Payment
Plan till age 75
OR
Annuity from
Life Takaful Co
After
75
All withdrawals taxed
At last 3 yrs tax rate
Deemed retirement
Cash withdrawal – 50%
tax free (deemed retirement)
Death Before
Retirement
Survivors as per
nomination deed
Transfer amount to
survivor’s VPS account
Purchase deferred
annuity starting at 55
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Tax benefits
•
As per Section 63 of the Income Tax ordinance 2001, Tax saving available on
contributions up to 20% of the taxable income
•
For an investor aged 41 or above, the contribution limit will progressively increase by
2% every year, up to 50% of taxable income
•
Contribution to MTPF effectively increases return on investment by the % of tax rate.
•
Latest amendments in tax laws have clarified provision of direct adjustment of these
credits at the time of disbursement of salary
13
Illustration of tax benefit & effective returns
*Illustration based on 15.45% annualized return on High Volatility Plan
*2% additional tax benefit after age of 40 till the total taxable income shall not
exceed 50% of the preceding year.
Age
Plan
Per
Annual
Month
Taxable
Minimum Income
Salary
Tax
Rate
Gross Tax Max
Percentage
of
Investment
for
Tax
Credit
Max
Tax
Investment Benefit
For
Tax Per Year
Credit Per
Year
40
High
500,000
Volatility
6,000,000
20.00% 1,200,000
20%
1,200,000
240,000
Effecti
ve
Return
(return
+ tax
benefit
)
35%
45
High
500,000
Volatility
6,000,000
20.00% 1,200,000
30%
1,800,000
360,000
35%
55
High
500,000
Volatility
6,000,000
20.00% 1,200,000
50%
3,000,000
600,000
35%
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Asset Allocation Schemes
•
Al Meezan Investments is offering 4 pre-set asset allocation schemes as following:
•
Participants can also select Meezan Life Cycle Plan as a suitable Allocation Scheme.
•
You may choose one of these Allocation Schemes with the above mentioned broad
allocation percentages.
15
Meezan Life Cycle Plan
•
•
•
•
Under this allocation scheme, contributions will be allocated according to a planned
asset allocation as per their age.
Since at different ages, investors’ risk appetite varies, the plan seeks to modify their risk
exposure as they grow older by progressively changing their asset allocation.
The younger the participant the higher the allocation towards equity market due to his
high risk taking ability with reference to long term horizon.
The allocation among different sub funds of MTPF shall be done on the basis of the age
of the Participant as per the following allocation table:
16
Expected Returns on Allocation Schemes
•
•
Returns* on Sub-Funds since Inception till February, 2012
– Equity Sub-Fund
– Debt Sub-Fund (annualized)
– Money Market Sub-Fund
(annualized)
9.60%
* Does not incorporate Tax Benefit
Expected net returns on Allocation Schemes
– High Volatility (80% equity,20% debt,0% money market)
– Medium Volatility(50% equity, 40% debt ,10% money market)
– Low Volatility (25% equity ,60% debt ,15% money market)
– Lower Volatility (0% equity,60% debt ,40% money market)
49.9%
9.40%
18.2%
15.45%
13.18%
10.80%
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Takaful Protection
•
Takaful protection from Pak Qatar Takaful being offered to all participants with
participation contribution of PKR 100,000
•
Coverage for Natural Death, Accidental Death, Permanent Total Disability (PTD) and
Accidental Medical Expenses
•
No hidden charges, all costs for Takaful protection borne by Al Meezan
18
Meezan Income Payment Plan
• The plan offers various payment options to the Participants of MTPF, who wish to
receive periodic income from their amount after retirement.
• Systematic Withdrawal Option
• The Participant may instruct to pay a fixed amount at the end of each Period . The
minimum amount is Rs. 500.
• Actual Appreciation Payment plus Fixed Amount
• The Participant may instruct to pay an amount based upon actual appreciation at
the end of the Period plus a fixed amount (i.e., at least Rs. 500). If investment
depreciates during the Period, only fixed amount shall be paid.
19
Performance – Starting Early
Age 25 years
Monthly Income Rs. 25,000
Retirement Planning
Target Retirement Age 60 years
Years Investing 35 years
Monthly Contribution Rs. 1,000 p.m
- The rate of return has not incorporated additional return earned /realized due to VPS tax savings. The case study presented above is just for illustrative
purposes & is not intended to reflect actual return on investments
Performance – Starting at Middle Age
Age 45 years
Monthly Income Rs. 250,000
Retirement Planning
Target Retirement Age 60 years
Years Investing 15 years
Monthly Contribution Rs. 20,000 p.m
- The rate of return has not incorporated additional return earned /realized due to VPS tax saving's The case study presented above is just for illustrative
purposes & is not intended to reflect actual return on investments
Comparison between VPS and Provident Funds
Components
Provident Fund
Purpose
Voluntary Pension Scheme
Both provide employees or dependants with income after retirement
Benefit
Lump sum on resignation
Lump sum plus regular pension payments at & after
retirement
Tax Rebate
Not Available , Furthermore,
Very attractive Tax rebate
employer contribution over
Rs.100,000 is taxable
Portability
Not allowed
Can easily transfer from one pension fund manager
to another (at no front end load)
Discipline
High chance of beneficiary spending
this money immediately
The VPS structure promotes disciplined savings and
spending.
Death and Disability
Savings/ Investments go to
Nominees
Savings/ investments go to Nominees, who then
have the options that were available to the deceased
Asset Allocation
Flexibility
No control over your investments
Independent pension account for each participant,
allows you to select desired Asset Allocation based
on personal Risk Tolerance
Islamic option
Absent
Available
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Contact Details
UAN: +92-21-111-MEEZAN (633-926)
Toll-free Helpline 0800-42525
SMS INVEST to “6655”
•Karachi – Registered Office:
(92-21) 35630722-26
•Sales Hub Karachi:
(92-21) 34536602-05
•Lahore Office:
(92-42) 35783608-12
•Faisalabad Office:
(92-41) 2412371-4
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