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Financial Adviser | Formula for calculating government employee pension

Published:Sunday | May 8, 2016 | 5:00 AM

I read your article in the Sunday Gleaner regarding applying for early retirement after a set amount of unbroken years of service. My question, though, is regarding settlement. Is there a formula set by the Ministry of Finance to calculate the payment that would be due to someone retiring early? I am confused regarding this as I am hearing different versions. Any information you can share would be greatly appreciated.

Conrod

FINANCIAL ADVISER: Employees of the Government may retire early if they are 55 years old or older and if they have completed at least 10 years of service. They may retire early on the grounds of ill-health, reorganisation of the department or agency, in the public interest, or at their own request through the personnel department of the employing agency.

The current formula for calculating retirement benefits is not expected to remain for long and should be replaced soon. The normal retirement age is 60, but it should change to 65 under the new system.

Whereas the existing scheme makes provision for early retirement, the new scheme, when it comes into force, will not make explicit provision for early retirement but will not hinder it. Persons who choose to leave early will lose 1 per cent per year of their pension benefit.

At retirement, some persons opt to take a full pension but no gratuity. Others opt to take a gratuity. Among this group are some who opt to take the full amount of their gratuity, while there are others who take it two portions as we will discuss later.

The existing formula for calculating the gratuity is 12.5 x 0.25 x the number of completed months of service divided by 540 x the last effective salary.

The 12.5 represents the number of years the pension is expected to cover. Multiplying by 0.25 is saying that the gratuity should be 25 per cent of the full pension benefit.

The number of completed months includes all full years of eligible service multiplied by 12, plus additional months less than one year.

The 540 represents the maximum period in months (the equivalent of 40.5 years) that the individual would be expected to be in the service.

The last effective salary refers to the salary earned in the last position to which the person was appointed and therefore excludes a position in which the person acted but was not appointed.

The gratuity is paid in two portions, the first called the advance being a lump sum of 70 per cent of the gratuity. It is generally paid within six to eight weeks of the required documents reaching the Pensions Administration section of the Ministry of Finance and the Public Service.

The second portion 30 per cent of the gratuity is usually paid four to six months after the advance portion provided that all forms have been delivered to the Finance Ministry.

The pensioner also receives with the advance portion of the gratuity what is called the alimentary allowance. It is paid to ensure that the pensioner does not fall out of pocket while the pension benefit is being finalised.

It represents the monthly reduced pension which that the pensioner will receive. It is calculated as follows: 0.75 x the number of completed years of service divided by 540 x the last effective salary.

One of the reasons that the process seems to take so long is that it is necessary to verify the true financial status of the pensioner. If the pensioner has outstanding employment-related debts due to the employer, these would bear on future payments as it would be necessary to make adjustments in light of the need to settle such debts.

The alimentary allowance effectively becomes the regular monthly pension if there is no need to make adjustments. After 12.5 years of getting a reduced pension in addition to the gratuity, the pensioner then receives a full pension.

As it now stands, from the above information that I received from the Ministry of Finance and the Public Service, there is not a special formula for calculating the pension benefit of an individual working in the government service who opts to take early retirement.

The formula used to compute the pension benefit takes into account the employee's eligible months of service. That is key.

- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.

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