Oran Hall | Financial security for the self-employed in retirement

Financial security in retirement requires having sufficient financial resources from a pension, savings, and investments to meet regular living expenses, leisure activities, and health-related expenses for as long as retirement lasts.

While some employed people often benefit from employer-sponsored pensions, the self-employed must make their own provisions for a pension to add to the other forms of income that all retired people need to beef up their pension.

The self-employed group is very wide. It includes professionals – doctors, engineers, and attorneys-at-law – for example, farmers, fishermen, hairdressers, barbers, vendors and electricians. These people work for themselves and may or may not have others working for them.

Like employed people, the self-employed ideally want to live in retirement at a level in line with how they lived while actively working. The ability to do so rests heavily on the financial resources available to do so, so it is important to make use of every resource that is in place to do so. In addition to a pension and investment income, there are benefits available through the National Insurance Scheme, NIS, the National Health Fund, NHF, and the NI Gold Insurance Health Plan.

To be able to qualify for NIS benefits, the self-employed are required to contribute 6 per cent of their annual income of up to $5 million. Benefits include old-age pension, $4,200 per week being the basic maximum and a funeral grant of $150,000. These amounts are revised from time to time, but it is clear that they are not significant. In fact, the NIS is not so much a pension scheme as an insurance scheme.

Every person in Jamaica is eligible to be a member of the NHF but must apply by using forms that can be collected from a doctor, hospital, pharmacy, or health clinic. It provides prescription drugs for a specific list of conditions, and the member must be registered for each condition. The benefits are accessible from NHF-participating pharmacies island-wide, and members may use both the NHF and private insurance to pay the expenses but must use their own funds to cover any shortfall.

The NI Gold is for NIS pensioners. Benefits include in-hospital room and board, surgeon’s and assistant surgeon’s fees, doctor’s office and home visits, diagnostic services, optical and dental services, and prescription drugs. Though helpful, these arrangements put in place by the Government are not generally able to meet the full cost of healthcare services, so the retiree should expect to fund a portion of the expenses.

A significant portion of the retiree’s income will inevitably come from the individual’s own efforts, and although not everybody has the same level of sophistication and skills in financial and investment management, there are opportunities and facilities for all to make some preparation. The key is to start early and to avoid derailing the programme by withdrawing funds.

Among the facilities available to generate income are approved retirement schemes or ARS, unit trusts, mutual funds, managed portfolios, self-managed portfolios, and some life insurance policies that generate cash values and investment values. Except for self-managed investment portfolios, none of these facilities require a significant level of investment savvy or the time of the individual.

The ARS is a defined contribution pension plan, or DCP, for employed people who are not members of an employer-sponsored pension arrangement and for the self-employed. In a DCP, the pension benefit is determined by the value of the member’s contributions and the income earned thereon. Thus, there are no guarantees on investment returns and the pension benefit.

DCPs are tax-efficient in that members can contribute up to 20 per cent of their income before being liable for income tax and the income earned on the funds are not taxed, though the pension above the income tax threshold is taxable.

One other benefit is that the contributions of the members are pooled with other people’s contributions and invested in several diversified investment portfolios and are professionally managed.

Unit trusts and mutual funds are pooled professionally managed investment funds that are available to all members of the public – including those with small sums – through their management companies, stockbrokers, and some commercial banks.

The funds are diversified but may vary significantly in their composition, depending on the investment objectives. For instance, if the objective is primarily for capital appreciation, the fund will tend to invest mostly in equities, real estate, or a combination of both. But there can be more conservative funds invested in short-term interest-earning instruments or in bonds, which are long-term interest-earning instruments.

Individuals may also engage portfolio management companies to manage their portfolio for a fee, but people who have the time and competence to manage their portfolios may opt to do so themselves.

The self-employed can have a financially secure retirement if they start early, save and invest well, and make full use of the government-sponsored benefits.

Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.finviser.jm@gmail.com