Tue | Mar 26, 2019

Stacey-Ann Mighty Whyte | Benefits of pension funds

Published:Sunday | December 30, 2018 | 12:00 AM
Stacey-Ann Mighty Whyte
Ronald Thwaites has lamented the silence of trade unions on pension reform, among other things.
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Retirement should be a time of happiness. It should be a time when you get to catch up on some of the things that you had always wanted to do but didn't had the time to.

Recently, my church sister retired from teaching at a prep school in Kingston, and what should have been a time of celebration had her worried. She was worried because she did not have any formal pension arrangement in place. She had some savings but was unsure how long this would last.

Her situation is not unique. According to the data from the Financial Services Commission, FSC less than 10 per cent of the employed labour force in Jamaica are members of pension arrangements.

Membership in pension funds can be accomplished either through a company sponsored superannuation fund or a retirement scheme. Superannuation funds are sponsored and established by companies for their employees.

Retirement schemes are offered by financial institutions and enable persons who are not eligible to join an employer-sponsored pension plan to enjoy similar benefits to those received by members of a superannuation fund.

Members of these tax-favoured funds receive immediate and long-term benefits for themselves and the society in general.

You retain more of your income through tax savings. Your pension contributions are deducted from your income before taxes are applied. Consequently, once you earn in excess of the income-tax threshold, contributing to a pension fund will reduce the amount you are obliged to pay as income tax.

For example, if you earn $150,000 per month and contribute $7,500 to a pension fund - which would be five per cent of your salary - you would save approximately $2,000 in taxes each month compared to a person earning the same amount who does not contribute to a similar fund.

If you don't contribute to a pension fund, you are leaving money on the table by paying more income tax than you are obliged to.

Your savings in a superannuation fund or retirement scheme grow much faster than in any other type of savings or investment vehicle since interest income in these accounts is typically not subject to withholding taxes. One gets the ability to accumulate and save that 25 per cent, which is deducted as withholding taxes from savings accounts or other investment vehicles that are subject to withholding taxes.

A major advantage of superannuation funds and retirement schemes is that the accumulated funds are protected from creditors. Regardless of the amount you owe to creditors, your accumulated funds are protected in the event you default on a loan or are adjudged as bankrupt.

Creditors may be able to claim on any other assets you own, including your place of residence and your savings in banks and other investment vehicles, but not your pension savings held in a superannuation fund or retirement scheme.

To pass on your benefits, you may appoint beneficiaries upon enrolment in a pension arrangement. You may change that designation at any time and for any reason.

In the event of your death, your designated beneficiaries are paid without a will having to be probated. Currently, there are no death duties or transfer taxes applicable on the payment of a pension benefit to your designated beneficiaries on your death.

These benefits make it clear that persons should become members of a superannuation fund or retirement scheme. The earlier you do so, the better it will be for you and your family.

- Stacey-Ann Mighty Whyte is a member of the Public Education Committee of the Pension Funds Association of Jamaica.

smighty@jngroup.com