Oran Hall | Don’t get sidetracked. Pension plans are for income in retirement

QUESTION: I have several grouses with defined benefit pension plans, but my biggest is that plan members are not allowed to remove funds from the pension plan to purchase property. I believe the legislation should be changed to accommodate pensioners to withdraw their contributions to purchase residential properties as by the time they reach retirement, they are not able to afford to purchase same. I believe it is beneficial to both the pensioner and to his livelihood and viability for him to be able to access those pension funds after a period of, say, 10 to 15 years to acquire a home.

–Lewis

FINANCIAL ADVISER: It is very important to be able to own where you live, but it is also very important to live at a reasonable standard in retirement. Both are very good long-term goals, and one should not be at the expense of the other.

Pension funds exist to provide a pension. Defined benefit pension plans exist to give a guaranteed monthly income to an employer’s employees who have retired.

It also extends to the retired person’s beneficiaries if the pensioner dies prior to the expiration of the term agreed in the contract. For illustration, the contract may provide for a pensioner to receive a pension for 10 years certain and life thereafter. In the event of the pensioner dying three years after the pension commences, the beneficiary receives it for the next seven years.

The pension benefit can be paid because the employer and employee make contributions to the fund, and they are invested to generate income to build up a pool of funds to pay the pension to the retirees when the time comes for it to be made.

Although the contribution rate of the employee is clearly stated, ultimately, the onus is on the employer to contribute at a rate that enables the defined pension benefit to be paid when due.

It is reasonable to expect contributions to remain in the pension fund to grow for the benefit of its members and ensure that the defined benefit can be paid to all members when their time comes.

Bearing in mind that the pension benefit in a defined benefit plan is a function of the years of service of the employee and the person’s salary, and that good investment returns make it more feasible, how would the withdrawal of even a portion of the person’s contribution ultimately affect the fund and its members? To what extent would these withdrawals affect the fund and the ability of its investment value to increase? Would the person benefiting from withdrawing funds to purchase a house expect to get the same pension that would be paid had the withdrawal not been made? If so, would the employer be expected to contribute more to make it possible to honour the defined pension benefit?

Alternatively, would the pensioner receive a smaller pension, and would it be enough to give a reasonable standard of living?

Jamaicans love to own their homes, but it is not always possible. Nonetheless, while saving for retirement, every effort should be made to save for home acquisition. The big problem is usually having the funds to make the deposit.

Every effort should be made to know the benefits offered by the National Housing Trust, NHT, and how to access them. I am quite aware that even NHT units can be out of the reach of many people, but though it is not the ideal, some contributors have found ways to own a home, for example, by joining with another person.

If home ownership ranks so highly on an individual’s scale of priorities, making some sacrifices to make it happen could be one approach to take.

At the end of the day, though, a comfortable retirement is more than living in one’s own home, as good and fulfilling as that may be. The pensioner’s goal should be to have a level of retirement income to live at a reasonable standard.

Paying rent, especially considering the likelihood of it increasing over time, can put pressure on the pensioner to live at the desired level. Additionally, dealing with a landlord and issues often associated with living at another person’s place can make life less-than-desirable.

I do not see the legislation changing to give you your heart’s desire, for pension funds are for paying pensions, not funding the purchase of houses for their members. I hope you can find a way to realise your goal of owning a home.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com