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How approved retirement schemes operate

Published:Sunday | November 4, 2012 | 12:00 AM
Oran Hall.
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An approved retirement scheme or ARS is recognised under the Pensions (Superannuation Funds and Retirement Schemes) Act, 2004 to enable its members to save for their pension at retirement.

The scheme must be approved by the Financial Services Commission in order to operate.

Membership is open to Jamaican residents who are at least 18 years old. They must be self-employed or employed in a non-pensionable post but not be members of an approved superannuation fund. Membership cannot be held in more than one scheme at the same time.

Upon termination of employment, members of a retirement scheme or approved superannuation fund are entitled to transfer their pension benefits to an approved retirement scheme.

The annual rate of contribution should not exceed 20 per cent of a member's annual income. An employer has no obligation to make contributions on behalf an employee but may choose to do so.

employer's contribution

The employer's contribution should be no more than 10 per cent of the employee's salary - the maximum prescribed under an approved superannuation fund.

The sum of the employer's contribution and the employee's cannot exceed 20 per cent of the employee's income.

The employer's contribution vests immediately to the member and the employer remits his contribution along with the amount deducted from the employee to the administrators of the scheme.

All contributions are held in trust by the trustees on behalf of the members.

Whereas some schemes require no minimum contribution, others do.

Members are required to make at least one contribution per year but contributions may be made each month. Some schemes allow ad hoc supplementary contributions. All contributions made to a scheme are invested on the member's behalf.

Generally, there are several types of funds in which the contributions are invested.

This allows for diversification but also allows the contributor to manage his risk exposure as he is usually able to choose how his contributions are distributed among the investment funds.

In much the same way that the portion of the member's income that is contributed to the scheme is not taxed, the income it earns in the investment funds is also not taxed.

Taxes are, however, payable on the pension payments made during retirement.

The investment funds are usually unitised so the contributions of the members are used to buy units whose values fluctuate with the value of the underlying securities in the respective funds but are also affected by the charges which the funds bear: a management charge, which is a percentage of the net asset value of the fund, brokerage fees, valuation costs, audit and regulatory fees, government duties and other charges related to the purchase, sale or maintenance of the assets of the fund.

Returns on the funds are not guaranteed so it is reasonable to expect low, even negative returns sometimes. All pension fund investment managers are regulated by the FSC and are inspected regularly.

Additionally, quarterly and annual reports must be submitted to the FSC to show how the money belonging to the scheme is being invested.

statutory regulations

The assets of the scheme must be kept separate from the assets of the sponsors and investment managers.

Investment activities are subject to statutory regulations prohibiting certain types of investments or placing limits on eligible investments.

Retirement benefits are payable at the normal retirement age chosen by the member - between the ages of 60 and 65.

A member may opt for late retirement, which cannot be greater than five years after the normal retirement age, or early retirement, which can be within 10 years of the normal retirement age.

At retirement, the fund value may be used to purchase an annuity or other approved income plan, but the member may also take 25 per cent of the accumulated value of his contributions less taxes and charges as a lump sum and use the balance to purchase the annuity or other approved income plan.

If a member dies before his retirement date, a death benefit equivalent to the full amount of the fund value less taxes, if any, and charges will be paid to the named beneficiary or beneficiaries.

Membership may be terminated if: the member no longer meets the eligibility requirements for membership in an approved retirement scheme; ceases to make contributions; dies and the benefit is paid out; the plan value is not enough to cover applicable charges; and if it is discovered that the application for membership contained material misrepresentations.

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. Send feedback to finviser.jm@gmail.com