Picture this: you have just retired, ready to enjoy the fruits of your labour, only to realise you have not saved enough to maintain your current lifestyle. It is a sobering thought that many Jamaicans may face in the coming years, often because we prioritise living our best lives now at the expense of later. A quick scroll through social media highlights escapades of others to exotic locales, which tempt us to live in the moment out of fear o
f missing out. While there is nothing wrong with “living your best life”, we need to make provisions to ensure we can continue to live our best lives later. Spending on immediate gratification items like fast fashion, dining out and travel has become more popular. However, the data does not indicate a proportionate growth in pension fund contributions that would allow Jamaicans to live well in the future. Would it surprise you to know that as of 2023, more than 80 per cent of workers in Jamaica are currently not in a pension arrangement separate from the National Insurance Scheme (NIS)? With Jamaica’s ageing population, we need to understand pensions and their role in helping us to live our best lives when we retire.

What is a Pension?

A pension is the money paid regularly to a person, typically after retirement. It is a safety net that helps to give financial independence in your golden years. This money will be paid to you as long as you are alive, but the amount you make will depend on the contributions you and your employer make now on your behalf. The pensionable age for any Jamaican in the workforce who was born after the year 1964 is 65, though some workplaces still have 60 as the retirement age. Investment experts have estimated that you need at least 40 years to thoughtfully plan and comfortably save and invest for retirement. This is why it is crucial to start planning for retirement as soon as possible. Poor planning can bring financial hardships like the inability to cover basic expenses once your usual salary or wage is gone. If you are in your late twenties, it is worth considering the years you are missing by not contributing to your pension. Jamaican men and women have an expectancy of 72 and 76, according to the Pan-American Health Organization (PAHO). So, let us say you stop working at 65, this means that you will likely live another 12 to 16 years after retirement. And with the increasing likelihood of health complications as you age, how will you ensure you have enough money to cover medical expenses, cover your bills and maintain a comfortable lifestyle? We are sharing this information not to scare you, but rather to urge you to plan to make your retirement as comfortable as possible.

The Need for Financial Education

Oh, I save money in a financial institution, you might say. That is good! But savings alone should not be seen as a replacement for retirement income. Suppose you have the financial backing of parents or relatives with assets, like a house that can be passed on to you. In that case, you will also need liquid cash for property taxes, house maintenance, groceries, monthly bills, health emergencies, etc. No one likes to talk about getting older, but it is important to be prepared. How often have we seen older people fall on hard times because retirement took them by surprise? Or senior citizens were forced to work well beyond retirement age because of insufficient retirement savings and other unfavourable outcomes associated with poor retirement planning. This is called old age poverty. Perhaps you’re providing financial assistance to an elderly parent or relative who did not or was not able to adequately prepare for retirement. Maybe it’s a financial burden that you and your siblings share, diminishing your ability to do more with your money, like making provisions to support yourself when you retire.

Please do not rely on your children to take care of you. The days of children being their parents’ pension are now more the exception than the norm. Instead, start educating and empowering yourself to shape and have control of your finances in your golden years.

Types of Pension Arrangements

Every working-age person — employed by the Government, the private sector, or even self-employed — can contribute to an approved pension scheme. There are mainly two types:

1) superannuation funds or employers’ pension arrangements

2) retirement schemes, for self-employed people and those not part of an employer’s pension arrangement

An approved superannuation fund is most common among employers. With this fund, full-time employees must make a mandatory contribution to the plan. The employer contributes a certain amount, and the employee contributes up to 20 per cent of their annual salary or a minimum of 5 per cent. The plus here is that the contributions are deducted from your salary before tax is applied, allowing you to pay less in income tax while putting more towards retirement. Meanwhile, the interest earned is also tax-free and, when you retire, you would typically be able to access a tax-free lump sum of up to 25 per cent of the balance in your retirement savings.

An approved retirement scheme, on the other hand, like NCB Insurance Agency and Fund Managers Limited’s SMART Retirement Plan, is for self-employed people, part-time and other workers who are not part of a superannuation fund or want to transfer their benefits to an approved retirement scheme upon the termination of employment. As with people who contribute to a superannuation fund, you can incrementally build retirement income and receive tax-deferred benefits. This plan is especially beneficial to our large informal sector of self-employed individuals, like hairdressers, nail technicians and gig economy workers. These groups often have fewer rights and benefits than full-time workers and are at a higher risk of dedicating years of their lives to working without building enough financial cushion after they have stopped working.

Bottom Line

How do you picture your life after retirement? While there is nothing wrong with spending to live your best life now, it is essential to make provisions for later as well. Contributing to a retirement plan now can help you establish retirement security and financial resilience for later years. By understanding the significance of a pension plan in your retirement planning, embracing financial education, and choosing the most appropriate pension option, we can empower ourselves to live our best lives now and, in the years to come.