Financial Adviser | NIS and retirement
QUESTION: I would like your help in understanding the matter of pension/retirement plans. I'm a NIS contributor. Can I join another pension plan or will that have implications? I'm trying to figure out how to go about securing my retirement as I know that the NIS benefits will not be sufficient.
FINANCIAL ADVISER: The National Insurance Scheme (NIS) is a contributory social security scheme which offers financial protection to workers and their families against loss of income due to injury on the job, incapacity, retirement, and death of the insured. It does not make you ineligible to participate in a pension arrangement.
The scheme is for employed, self-employed and other persons as specified under the National Insurance Act 1966. They are required to make contributions from age 18 up to the age of retirement.
For employed persons, both employer and employee make contributions but self-employed persons contribute a sum equivalent to the contributions of the employer and employee. The government does not make a contribution to the scheme.
Among the benefits payable are old age benefit, invalidity benefit, widower's and widow's benefit, which includes a pension or grant, orphan's pension or grant, funeral grant, employment injury benefit, employment disablement benefit, employment injury death benefit and NI Gold health benefits.
The NIS was never meant on its own to provide a livable income to anyone during retirement.
A pension is paid when employed and self-employed persons who are members of a pension arrangement officially retire, or automatically leave the workforce.
There are two types of approved pension arrangements, that is, arrangements sanctioned by the government: the superannuation fund, also called a group pension plan, and the retirement scheme.
The superannuation fund is established by a company or association for its employees or members and the retirement scheme is established by a company licensed by the Financial Services Commission to transact this type of business. Persons who are not members of a superannuation fund or who are self-employed are eligible to participate in this type of pension arrangement.
varying level of payment
The two most popular kinds of pension plans are defined benefit plans and defined contribution plans, also called money purchase plans. Defined benefit plans use a prescribed formula to determine how much pension will be paid at retirement, but there are several arrangements for determining the level of payment, each of which yields a different pension payment.
The pension paid from a defined contribution plan is based on the contributions made by the employer and the employee and the interest earned thereon. Approved retirement schemes operate on a defined contribution basis.
In the case of a superannuation fund, the member may contribute up to 10 per cent of pensionable salary. If it is a defined contribution plan, the employer may contribute up to 10 per cent of pensionable salary but, if it is a defined benefit plan, the employer may contribute at the rate required to give the promised benefits to the employee after taking account of the member's basic contribution.
The basic contribution is also called the required or mandatory contribution. This is the stated percentage of taxable salary which each member must contribute to the approved pension arrangement.
But members may also make voluntary or optional contributions, being the stated percentage of taxable salary up to which each member may contribute to the approved pension arrangement.
In respect of the retirement scheme, the total contribution rate must not exceed 20 per cent of pensionable salary. An employer may contribute up to 10 per cent of pensionable salary. The member may contribute no more than 20 per cent of pensionable salary less the contribution made by the employer on the member's behalf.
Approved pension arrangements tend to have a vesting formula, which states the amount of money - excluding the member's input - which is available to provide a deferred pension to the member who chooses to exit the arrangement before normal retirement age. A minimum number of years in the pension arrangement is required for members to earn vesting rights.
A deferred pension is that paid at normal retirement age and beyond to a member who withdraws from the pension arrangement before attaining the age of retirement.
Your pension will not be equivalent to your pre-retirement salary so it is important to be able to have benefits from the NIS to help cushion the loss of some of your income in addition to the other non-pension benefits that it provides.
If you are not a member of a superannuation fund, I suggest that you seek out an approved retirement scheme from the life insurance companies, credit unions and other financial institutions.
You will be pleased to know that the contributions you make to the approved pension arrangement are deducted before tax is applied and that the income earned on such funds is not taxed, but your pension will be.
n Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.