April 25, 2012

Smart Tax Savings through Voluntary Pension Schemes

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Outline

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I. The Need for Retirement Planning

II. Voluntary Pension Schemes

III. How VPS Works

IV. Comparison between VPS & Provident Fund

I. The Need for Retirement Planning

The Need for Retirement Planning

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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

Global Pension Statistics

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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

Pension Alternatives in Pakistan

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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:

• Very low returns • Lack transparency

• Lack of premature accessibility (in most cases)

Private citizens primarily depend on:

• Yield on property • Interest on bank deposits/NSS• Or alternatively depend on their children for retirement support

II. Voluntary Pension Schemes

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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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Benefits• A long term saving mechanism with

flexibility of varying exposure to different asset classes

• 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

• 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

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

Fund Size as of Mar 31, 2012: PKR 600 Mn.

Sales Load: 3%

Launch Date: June 2007

Meezan Tahaffuz Pension Fund

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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.

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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

Equity Sub Fund

Debt Sub Fund

Meezan Tahaffuz Pension Fund

Contribution

All

ocat

ion

Pol

icy

Al Meezan Investments

Sales Load upto 3%

At Retirement (on/after 60)

Before Retirement

Disability Before

Retirement

Death Before Retirement

Survivors as per nomination deed

50%

50% Annuity from

Life Takaful Co

Income Payment Plan till age 75

OR

Tax free redemption

After 75

All withdrawals taxed At last 3 yrs tax rate

Deemed retirement

Cash withdrawal – 50% tax free (deemed retirement)

Transfer amount tosurvivor’s VPS account

Purchase deferredannuity starting at 55

M.M Sub Fund

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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

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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 Month Minimum Salary

Annual Taxable Income

Tax Rate

Gross Tax Max Percentage of Investment for Tax Credit

Max Investment For Tax Credit Per Year

Tax Benefit Per Year

Effective Return(return + tax benefit)

40 High Volatility

500,000 6,000,000 20.00% 1,200,000 20% 1,200,000 240,000 35%

45 High Volatility

500,000 6,000,000 20.00% 1,200,000 30% 1,800,000 360,000 35%

55 High Volatility

500,000 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.

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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:

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Expected Returns on Allocation Schemes

• Returns* on Sub-Funds since Inception till February, 2012

– Equity Sub-Fund 49.9%

– Debt Sub-Fund (annualized) 9.40%

– 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) 18.2%

– Medium Volatility(50% equity, 40% debt ,10% money market) 15.45%

– Low Volatility (25% equity ,60% debt ,15% money market)13.18%

– Lower Volatility (0% equity,60% debt ,40% money market) 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

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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.

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

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Comparison between VPS and Provident Funds

Components Provident Fund Voluntary Pension SchemePurpose 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, employer contribution over Rs.100,000 is taxable

Very attractive Tax rebate

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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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

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Contact Details

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