AN individual retirement account (IRA) is a great tool for gaining significant tax advantages on your retirement savings, according to Sagicor Life Jamaica investment manager Brenda-Lee Martin.

“It’s the only way that you can save for your pensions in a tax efficient manner, so it really is an excellent benefit,” noted Martin last week during her address at the Jamaica Stock Exchange (JSE) Fifth Regional Investments and Capital Markets Conference at the Jamaica Pegasus hotel in Kingston.

Contributions to an IRA — officially known as an Approved Retirement Scheme by the Financial Services Commission in Jamaica — are taken from your salary before it is taxed; returns on investment are tax exempt; and tax is deferred until retirement, which means an individual owes no tax until earnings are withdrawn.

In fact, contributions made to pension plans and the National Insurance Scheme (NIS) are not tax deductible, but Martin said that, “The current NIS and other retirement sources increasingly do not provide adequate retirement income.”

The tax advantage of the IRA, Martin said, is just one of the key benefits of the account, adding that individuals get to choose investment options — stocks, bonds, or real estate — which can protect against inflation, and participants are also protected from creditors.

“If you owe somebody money, they cannot touch your pension savings to settle,” explained Martin about the latter.

Indeed, IRAs have become a hit on the local market over the last 18 months — six local companies, including Sagicor Life Jamaica, have launched IRAs over the period, with five of those being introduced since March.

Interest in the local pensions market was heightened in March 2008, when amendments to the Income Tax Act were effected, making retirement schemes more attractive as an investment instrument for individuals, and as a way to penetrate an underserviced market for financial institutions, who note that only 10 per cent of the local working population are in a pension plan.

A major objective of the ammendment was to lift the ceiling to which self-employed persons and persons not contributing to a pension plan can contribute to retirement schemes. Those persons can now contribute up to 20 per cent of annual salary each year to a scheme with the same tax incentives as allowed under a company pension plan. Prior to this, the ceiling was $6,000 a year, making such schemes unattractive.

Persons already contributing to another pension plan are not eligible to set up an IRA, and Martin told Sunday Finance that individuals are generally not allowed to opt out of a company pension plan because it’s normally a condition of employment.

The retirement age in the Pension Act is anywhere between 60 and 65 years. Individuals with an IRA will start receiving benefits at retirement or can opt to start receiving benefits after an ‘early retirement’ within 10 years of the stipulated retirement age, or after ‘late retirement’ up to a maximum of five years after the stipulated retirement age.

“But recognise that when you go early, you collect less,” she noted.

“(Late retirement) allows you to save for a longer period of time and get a better benefit when you decide to collect your pension,” she added.

A benefit is also payable if an individual is permanently disabled before retirement or upon an individual’s death, with a named beneficiary receiving a refund of total accumulated contributions with interest.

The private pensions industry is in excess of $120 billion, but this covers less than 100,000 persons. Against this background, Martin advised that Jamaicans need to become more aware of the importance of saving towards retirement.

“Despite the many financial challenges being faced by individuals at this time, the issue of retirement planning must remain in the fore of all persons as delays to commence this action could prove quite detrimental in later years,” she said.