Planning for life — pensions and old age


Planning for life — pensions and old age

Observer Business Writer

Sunday, January 24, 2021

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Life is a continuous j ourney which can be full of joy, jubilation, sorrow, tears and regrets. When everything is fine, we forget to plan for the future as the present is always a constant that deserves the most attention. This slight dissuasion for future planning came full circle recently with COVID-19, as many people realised that their future became the present overnight as lives changed for the better or worse.

Many people had to start from nothing again as they either had to liquidate assets or were put in a worse financial position within the present time. As a result, some people had to seek moratoriums on loans, ask for extensions of waivers on rent or other subscriptions to a certain product without facing a penalty. Some people will recover and get back on track, but they may end up asking more questions about what the future may hold for them due to this setback.

Although we may take the present for granted, we all have to get old some day and retire if the job stipulates a time to stop working. The retiree would no longer have a salary and would have to rely on kids, family or what was possibly saved up in their life. However, these aren't sustainable options since something else can always force a change to that other person's life or inflation can continue to decrease your purchasing power of your money.

National Insurance Scheme (NIS) contributions are mandatory with most formal jobs which sees a portion of your income taken out each month to be paid out at retirement from your formal employment years. This would be paid in the form of a fortnightly pension, which, in 2021, could be as low as $5,000 at each collection period. The problem with this amount is that inflation will continue to erode the value of that income and result in it covering less items from your grocery basket.

Some businesses have a pension plan for their employees in either the form of a defined benefit (DB) or defined contribution (DC) plan. In a DB scheme, the employer would contribute to the plan and the employee would get access to it at retirement. This was what some of our parents benefited from when they started working before 2000. A DC plan sees both the employee and employer contributing to the pension plan, whereby the employer would match any contributions by the employee. There's a 10 per cent cap of one's salary that one can be contributed under this type of plan based on current regulations.

If the plan is invested properly by the fund managers, your pension from this plan should help supplement your income when you retire along with the NIS pension. The problem with this situation is that only about 10 per cent of the Jamaican workforce is involved in any pension plan as provided by the Financial Services Commission statistics. This means that only about one in 10 Jamaicans has some form of extra income which they can expect to use at retirement.

The beauty about a pension plan is that contributions are tax free and if the contributor dies before retirement, the value of the plan can be paid out as an annuity to your beneficiaries or estate to support them since there'll be one less person earning in the household. This means that it acts as a form of insurance to your family members in the event of your untimely passing or inability to work again.

Since living costs have been rising at faster rates over time, some people have been focusing on investing in financial securities such as stocks and bonds with the dividends and coupon payments acting as their pension at retirement. This isn't a bad strategy especially for stocks since a dividend yield of five per cent would mean that the stock would pay for itself in 20 years while there would be possibly unrealised gains. Any dividends after that would just be free cash you could use to do anything you want such as pay bills or have dinner. If those dividends are reinvested back into the stock, then the potential gains would accrue even further. Bonds are just as attractive since one can buy bonds and know that there is a fixed payment coming in a stipulated time frame.

However, financial securities can only do so much and no more. The main premise of this idea is that the company will survive in perpetuity and will continue to pay dividends or the interest on the bonds. Only a few companies which listed on the Jamaica Stock Exchange in 1969 are still listed today with dividend payments lower due to the implications of COVID-19. Some 'pensioners' got a rude awakening as well last year when the Bank of Jamaica restricted the dividends of the financial holding companies to those owning less than one per cent of the shares which meant some listed companies didn't pay out dividends at all or couldn't due to their dividend income being stripped away from that stipulation. The Digicel bond saga was just as significant since many pension holders ended up having to suffer haircuts as large as 65 per cent on the original principal they invested.

All of these examples only show that planning for old age requires critical decisions and several deliberations to ensure that there is a strategy for any scenario which may come up. One thing, which is certain, is that old age will come, and one should plan for it today and not tomorrow. Speak with a licensed financial advisor about your options for your future.

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