Financial Adviser | Pension investment for 47-year-old self-employed
QUESTION: I read with great interest your response to a question regarding the NHT. What in your expert opinion would be the best pension investment for a 47-year-old self-employed person with US$1,000 to invest a life insurance or bank pension scheme; a unit trust fund, voluntary contributions to the NIS, or just put it in a bank account?
FINANCIAL ADVISER: You have presented four options, which I will discuss before making a recommendation. I trust that the sum you have now is just the first contribution to your retirement fund. I hope you understand that you will need to keep adding to it to have a meaningful sum available to you when you retire.
I believe the pension scheme you refer to is an approved retirement scheme, which can be sourced from many financial institutions. This scheme is a defined contribution arrangement. The pension you will receive will be determined by the value of your contributions and the income earned thereon.
You may contribute up to 20 per cent of your income. Such contributions will not be taxed. This is a huge benefit which gets better, considering that the income earned thereon is also not taxed. You will not get the full benefit of every cent that you contribute to the scheme as the managers will deduct their fees from the portfolio as compensation for their efforts.
As your contributions will be pooled with those of others, the scheme will be able to invest in a diversity of instruments. This should be quite beneficial. Additionally, the fact that the funds will be managed by professionals removes the need for you to devote time and to acquire expertise to manage the investments.
A major drawback is that you take all the risks so if the funds do not do well, you will not have much retirement income. There are no guarantees.
A unit trust fund offers some of the advantages of the approved retirement scheme. It is a pooled fund which invests in a diversity of investment instruments. This reduces the level of risk of your investments. To a large extent, the income earned is not taxed.
On the other hand, the managers charge for their services and there are no guarantees. Your investments will be made with after-tax dollars as opposed to pre-tax dollars in the case of the approved retirement scheme.
You do not have to invest in one unit trust fund. There is quite some variety in terms of the types of funds and the managers of the funds. You may choose funds that invest in the money market and the long-term fixed income market, funds that invest entirely in Jamaican securities or in a mix of Jamaican securities and foreign currency-denominated securities, or blended funds that invest in a wider range of securities, just to mention some options. Your attitude to risk will be critical in deciding how you invest. It seems to me, though, that you would likely need some guidance in selecting the funds best suited for you.
The unit trust is an option, like the approved retirement scheme, that allows for the consistent laying away of funds for your retirement, but you must resolve to put away funds on a programmed basis and stick to your plan as the unit trusts will not force you to make investments at any time.
One major risk is that, because of their liquidity, it is tempting to encash units to make funds available for matters other than the purpose for which you have established your programme. If you were to yield to such a temptation, you could deprive yourself of a retirement income.
Whichever option you choose, it makes sense to contribute to the NIS. Indeed, it is a requirement. There are several worthwhile benefits to be derived from that scheme but you should not see it as a pension scheme. It is true that it does pay some form of pension along with other benefits, but you would not be able to live just on those disbursements.
As for putting your money in the bank, that is an option that will not generate the kind of financial resources necessary to sustain you in your retirement. Your funds will be safe enough but will not be adequate.
You are 47 so you are off to a relatively late start, but it is good that you want to start. You will likely need to save a fairly large portion of your income if you are to retire with a reasonable level of income.
An approved retirement scheme, which is meant for self-employed persons like you, plus investments in at least one unit trust fund for amounts over 20 per cent of your income, and contributions to the NIS seem to be the way to go.
- Oran A. Hall, the principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. firstname.lastname@example.org