Do formal pension arrangements really make a difference?

Oran A. Hall, Contributor

Question:  I recently attended the FSC Financial Planning Expo at The Pegasus hotel from September 16-17. I found it very informative and got much to think about, particularly on the first day, as I listened to presentations on retirement planning and gathered information from the booths of the insurance and investment-management companies.

There was a strong focus on products, but I was able to learn much about the approach of the respective companies to the management of retirement funds and the services available to the public.

I am self-employed, am only about 10 years from retirement, and have yet to realise my goals. Is there still merit in contributing to a formal pension arrangement?

- L. Clare

PFA: The Financial Services Commission (FSC) is responsible for regulating the pensions, securities, and insurance sectors but is also making serious efforts to educate the public to empower consumers to make more informed and suitable financial decisions. I commend you for taking advantage of the opportunity to equip yourself to secure your financial future.

Fewer than 100,000 Jamaicans had formal pension arrangements prior to the introduction of the Approved Retirement Scheme for the self-employed, contract workers, and other employed persons not contributing to an approved superannuation fund.

There is merit in having a formal pension arrangement. In your case, the time for your contributions to grow to give you very meaningful benefits is quite limited but 'better late than never'.

In any event, I doubt your pension would be your only source of retirement income.

National Insurance Scheme

I hope you have been contributing to the National Insurance Scheme which pays a small but useful pension, and other benefits, including the NI Gold Insurance. Men qualify at 65 and women at 60.

There are huge tax benefits to persons who participate in either of the approved pension arrangements. The portion of your salary that goes into the pension fund is not taxed.

The sponsor of a superannuation fund may make ordinary annual contributions for a member not exceeding 10 per cent of the member's annual salary or wages. The annual contribution of an active member is also capped at 10 per cent of annual salary or wages.

The Approved Retirement Scheme is appropriate for a self-employed person like you. Call around to different financial institutions to see what they offer.

The retirement scheme is open to persons between 18 and 68, but members may retire 10 years before, or five years after the normal retirement age, which is 65. You may contribute up to 20 per cent of your gross annual income.

But there is more. Although it is true that you as an investor may be able to identify investment instruments such as stocks and certain interest-earning securities that do not attract tax, you cannot totally avoid paying tax on your investment income. The income earned on pension investments is not taxed, so that is a clear advantage.

You may not have the time and expertise to manage your pension portfolio. Pension funds are managed by full-time investment managers who generally know the market and have their own reputation to protect. A managed portfolio facilitates ease of management.

Additionally, the pooling of the funds of the many makes it possible for your funds to be invested in high-priced investment assets such as real estate in which you, as an individual, may not be able to invest. This also facilitates investing in a wider variety of assets in several markets, thereby reducing risk.

The prudent management of pension funds is enhanced by the serious oversight role of the trustees, who are ultimately responsible in law for the overall administration and management of the superannuation fund or retirement scheme.

Not to be ignored is the FSC, the regulator which is responsible for licensing the administrators and investment managers, registering the trustees and "responsible officers", who must satisfy stringent "fit and proper" requirements, and for approving the funds/schemes themselves.

Saving in a formal pension facility encourages discipline. It takes the funds out of the hands of the prospective pensioner thereby removing the temptation to use those long-term funds for short-term 'emergencies'.

There are several providers of pension-management services - some new, others seasoned. Before making a decision about who to entrust the quality of your retirement to, look at the track record, financial strength, and management of the provider. Look also at the owners of the provider and their track record. Don't make a hasty decision.

Saving for your retirement through a formal pension arrangement is safer and almost certain to give you a better pension than doing so on your own. You are late, but start now.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. Email viser.jm@gmail.com