Oran A. Hall, Contributor
I am an active reader of your 'Personal Financial Adviser' column for 'The Gleaner', and I appreciate your interest and view sharing. I would like to know if the Jamaican laws allow for a citizen to hold more than one retirement scheme/pension savings account and if holding other financial instruments such as the popular 'five-year tax-free' can also limit my options.
- J. Green
The Pensions (Superannuation Funds and Retirement Schemes) Act 2003 states that "the members of an approved retirement scheme are persons who:
1) Are self-employed or are employed in non-pensionable posts and do not otherwise contribute to an approved superannuation fund or another approved retirement scheme; or
2) On termination of employment have transferred their pension benefits from an approved superannuation fund to the approved retirement scheme."
From the above, there does not seem to be room for a Jamaican citizen residing in Jamaica to hold active membership in more than one approved pension arrangement.
Individuals, however, may choose to retain their pension benefits in the formal pension arrangement of a former employer and thus receive a deferred pension at retirement.
It is possible, though, to hold other instruments that receive favourable tax treatment.
The five-year tax-free instrument that you refer to is generally called a long- term savings account but has many different names depending on the issuer. The requirements to be met for the owner to enjoy favourable tax treatment are rigid.
The maximum sum that can be invested in such an account is $1 million per year but it can be made in several instalments, each of which would form one contract.
Each contract is for five years during which no withdrawal of principal is allowed. No more than 75 per cent of income earned in any year can be withdrawn and the instrument cannot be used as collateral. It cannot be transferred unless the owner dies or becomes bankrupt.
An individual may own more than one long-term savings account and may also use more than one type of financial instrument. Money-market unit trusts qualify as do several savings instruments marketed by financial institutions such as building societies, credit unions and stockbrokerages.
Whereas each contract issued by a financial institution must run for a full year at a time, contracts issued by unit trusts do not have to run for a full year in the first year to reap favourable tax treatment.
At whatever point a contract is made, it counts as one year at the end of the calendar year.
Long-term savings accounts must be registered with the Ministry of Finance stating the name and TRN of the account holder and the value of each contract.
The chances of exceeding the limit allowed by law are, therefore, slim. They must also be registered for tax purposes.
Families should arrange their affairs to get maximum benefit from this savings arrangement considering that each person may invest up to $1 million per year for five years. Account holders should remember to make a will to ensure the smooth transfer of these accounts in the event of their death.
Life insurance is one other means of building up a tax-free pool of funds for retirement or other long-term purposes.
Although the sum assured is a useful means of providing tax-free benefits for the beneficiaries of the policyholder, the investment income earned also provides tax-free income for the policyholder as well as for the beneficiaries.
Capital gains on stock and capital growth unit trusts are also useful sources of long-term tax-free investment income.
Although Jamaican law does not allow a citizen to be an active member of more than one approved pension arrangement, there are several additional instruments that can be included in a tax-efficient savings/investment portfolio.
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 email@example.com