Your Social Security Pension

Understanding Your Social Security Contribution Scheme

One of the main pillars of Malta’s social security system is the Social Security Contribution Scheme.  The social security contribution scheme does not provide you only with a pension on retirement,  but also only entitle you amongst others to:

• An Invalidity Pension until you reach your retirement age in the event that you get injured or suffer from a medical condition and you can no longer work.  On reaching your retirement age your will receive the social security pension.

• A Widow’s Pension will be received by your spouse until he or she reaches his or her retirement age in the event that you pass away before your retirement age.  On reaching retirement age, your spouse will receive the social security pension or the widows pension, whichever is the highest.

• A Survivor’s Pension will be received by your spouse in the event that you pass away after your retirement age.  If your spouse qualifies for a pension in his/her own right, he/she will receive the higher between your retirement pension and the survivor pension.

• Six months unemployment benefits in proportion to social security contributions you paid in the event that you are rendered unemployed.

• Free healthcare services.

The social security contribution that you pay is not added up into an “individual pension account”.  This contribution is paid into the Fund.  This allows the Fund to provide for inter-generational solidarity by pooling all contributions received from young, middle aged and elderly persons in employment so that protection benefits referred to above can be provided to you and your family.

Different terms associated with retirement pension

Different terms are used to refer to the retirement pension provided to you under the Social Security Act (SSA).  You come across terms such as the NI Contribution Pension, State Pension, Social Security Pension, Two-Thirds Pension, Contributory Benefits Pension and Retirement Pension, amongst others.

The SSA defines a pension in respect of retirement under the social security contributions scheme as a retirement pension.  To qualify for such a pension you need to meet certain qualifying conditions established under the SSA.

The retirement pension is different from the age pension.  To differentiate between the retirement pension under the social security contribution scheme and the non- contributory age pension, this article refers to the retirement pension as the Social Security Pension.

Note that the social security pension is also different from a service pension, second pension, a mandatory second pension (or mandatory second pillar pension) and a third pension (or third pillar pension).  These are defined below:

Age Pension 

This is a means-tested non contributory benefits pensions.  To qualify for a retirement pension under the social security scheme you need to pay a minimum level of social security contributions.  If you do not pay this minimum level of social security contributions, you will not qualify for a retirement pension.

Malta’s social security system, however, is designed to provide its citizens with a safety net.  Thus a person who has failed to pay the minimum level of social security, contributions may be entitled to an age pension.

Receipt of an age pension is not automatic for a person who failed to qualify for a social security pension.  For a person to qualify for an age pension, he/she has to pass a capital and income means test.

The capital and income means test is a mechanism that ensures that only persons who do not meet a defined level of capital and income resources qualify for the receipt of an age pension.

Service Pension 

Prior to the introduction of the social security contributions scheme in 1979, employees were in receipt of occupational pensions paid by their employer.  For example, employees who joined the government prior to 1979 were in receipt of what is known as ‘The Treasury Pension’.

The social security reforms of 1979 no longer allowed for the payment of occupational pensions by employers to their employees.  Most private employers liquidated such occupational schemes.  Others, such as the treasury pension continues to be paid to persons employed in 1979 or earlier subject to certain conditions.

Second Pension 

This is a pension that governments in a number of countries introduced to encourage persons to save to top-up their income in retirement over and above the pension income they will receive from the State.

In a second pension scheme the contribution that you would pay would go directly to a pension account that belongs to you.

A second pension scheme can be introduced in a mandatory or voluntary manner.

Malta does not have such a pension scheme in place today.

Third Pension 

The government to encourage people to save for retirement incentivises you, normally through tax credits, to invest in a personal private pension scheme.  Given that you have benefited from an incentive to invest in a personal private pension scheme you are subject to certain conditions on how you can draw down your savings from such a scheme.

Normally such a personal private pension scheme is long term and ‘locks’ your savings up to a certain age, for example not before the age of 50 years.

Thereafter you are allowed to opt to withdraw a small proportion of your saving as a lump sum with the remaining large part of the savings to be received as a monthly annuity or a programmed annual / monthly drop down income or any other form of income withdrawal as established by the regulatory framework.

In 2015 Malta introduced a legislative framework for the provision of a third pension.  In fact, since November 2015 financial third pension schemes are being provided by local financial service providers.

Why is it Important to understand how the social security pension works?

It is important that you understand how the social security pension works so that you can plan for the quality of life you wish in retirement for you and your family.  If you do not know what income you will receive from your social security pension you run the risk of underestimating how much more you need to save to enjoy your retirement as desired.

You are more likely to bridge the gap between the pension income you will receive under the social security pension and the desired quality of life when you are in employment and earning income.

A miscalculation in your retirement planning during your life event journey leading to your retirement is likely to negatively affect you and your family’s quality of life during retirement.  Once you have retired, it may be too late to boost your social security pension with other income as, at that point in time, you are likely to have limited opportunities to build a retirement savings egg nest.

Understanding your social security pension

The Social Security Act (SSA) provides for two types of employment.  A Class One (I) contribution refers to a person who is employed.  The social security contribution you pay under this class is as follows:

• 10% by you.
• 10% by your employer.
• 10% by the State.

The contribution paid is on basic wage and capped to a Maximum Pensionable Income (MPI).

If you are a self-employed person or a self-occupied person, you pay a Class Two (II) contribution. The social security contribution you pay under this Class is as follows:

• 15% by you.
• 7.5% by the State.

The term ‘Self-Employed’ in the Social Security Act has a different meaning from that which you use in normal conversation

The terms ‘self-employed person’ or a ‘self-occupied person’ as applied under the SSA are deceiving.  The term ‘self-employed in the SSA does not mean what you understand by it in normal conversation,’ a person who is self-employed.

The SSA defines a self-employed person, as you understand it in normal conversation as ‘self-occupied’.  More specifically the SSA defines a self-occupied person as a ‘person who is a self-employed person who is engaged in any activity through which earnings exceeding €910 per annum are being derived’.

The term ‘self-employed’ as applied in the SSA means a person who has not yet passed his or her 65th birthday, ordinarily resides in Malta, and is neither an employed person nor a self-occupied person.

For the purpose of this article, the term ‘self-employed’ is applied to describe a person who runs his or her own business.

Your social security pension if you were born on and before 1951 and worked as an employee (and not in receipt of a service pension)

If you are born on or before 1951, you are already retired and in receipt of a social security pension.  The pension income that you receive is calculated as follows:

• Yearly average of the best 3 consecutive calendar years within the last 10 consecutive calendar years.
• You paid social security contributions of 10% on your basic wage to a Maximum Pensionable Income of €17,933 and an annual increase of the Cost of Living Allowance (COLA) awarded annually.
• If whilst in employment you benefited from a collective agreement your social security pension income will be adjusted upwards every time the wage conditions of the grade you held is increased as a result of a collective agreement adjustment.  If your work was not covered by a collective agreement your pension will increase by the annual COLA awarded by government.
• You retired at the age of 61 years (if you are a woman you may have retired at 60 years of age).
• To qualify for a full pension you had to pay a minimum of 50 social security contributions annually for a maximum of 30 years.
• There is a Guaranteed National Minimum Level (GNML) of pension in place, which ensures that you are protected against poverty in the event that you did not pay the full contributions you were entitled to pay.

If you are in this category of pensioners, you can continue to work as an employee or self-employed person and still receive the full pension you are entitled to.

If you take up such employment, you will continue to pay your social security contribution until you reach 65.  It is important to note that such a contribution is not assigned to your contribution history but will be posted in the consolidated fund.

Your social security pension if you were an employee born between 1952 and 1961 and work as an employee (and not in receipt of a service pension)

If you are in this age bracket your social security pension will be governed as shown in the Table below.

The State pension also provides for a Guaranteed National Minimum Level of Pension (GNML), which seeks to protect you against poverty.

Once you reach the retirement age, you can continue to work as an employee or in a self-employed capacity and earn an income whilst continuing to receive the full income from your Social Security Pension.  If you take up such employment, you will continue to pay your social security contribution until you reach 65.  It is important to know that this contribution is not assigned to your pension contribution history but is posted in the consolidated fund.

If you accumulated a minimum of 50 weekly contributions for a period of 35 years, you could retire when you reach the age of 61 years. If you meet these conditions and retire you will not be allowed to continue in employment until you reach your statutory retirement age (62, 63, or 64 years of age depending on your date of birth).  This is a ‘social cost’ that you are asked to incur for the decision you made to choose ‘leisure’ as against continuing to contribute productively up to your retirement age.

Your Social Security Pension if you were born on or after 1962 and work as an employee

If you are born in this age bracket, your Social Security Pension is based on the rules showed in the Box below.

Based on this formula, the MPI between 2014 and 2019 increased as the below:

Social Security Contributions paid on basic wage or salary

The social security contribution you pay is only on the basic wage or salary.  In paying your social security contribution additional income such as car allowance, performance bonus, production bonus, overtime, petrol allowance, etc. is excluded.

Example

You have a compensation package that consists of a salary, petrol allowance, overtime, and a performance bonus.

In 2018 the total income earned from your employer was €15,300.  This consisted of:

• Salary:   €13,000
• Petrol Allowance:  €500
• Performance Bonus: €800
• Overtime:   €1,000

You do not pay the 10% social security contribution on €15,300.  You pay your 10% social security contribution on your salary of €13,000.  Thus, the annual social security contribution you would have paid for 2018 will be €1,300 and not €1,530.

Maximum Pensionable Income

The 10% social security contribution you pay on your salary is capped.  This is known as the Maximum Pension Income.

Following the 2007 pension reforms, there are in place two Maximum Pension able Income caps.  These are:

• If you were born between 1952 and 1961, then the Maximum Pensionable Income cap is €17,933.
• If you were born on and after 1962, then the Maximum Pensionable Income cap is €22,138.

Example

If you earned €25,000 in 2016 and you were born between 1952 and 1961, the social security contribution that you pay is €1,793 and not €2,500.

If you earned the same amount of money in 2016 but you were born on and after 1962 the social security contribution that you pay is €2,213 and not €2,500.