Last week, I received a call from a 61-year-old self-employed male who wanted to start a pension with a $10,000 monthly contribution. This amount is much too little too late. The projected contributions plus interest at the normal retirement age of 65 would be less than $1,000,000.

He knows that $1,000,000 cannot cover his living expenses for a year. It costs more to save for retirement at an older age because there is less time to save and invest.

Some pension contributors fail to realise that their pension is a salary replacement and, to their disadvantage, contribute the “bare minimum” or wait too late to make contributions. Fortunately, the aforementioned self-employed senior plans to retire beyond the normal retirement age and hopes to continue working as long as he remains healthy, while investing his savings.

That’s his best option. Though he is late in getting started, the solution is to take action. He hasn’t lost his enthusiasm and this attitude is important to achieving his goal of a comfortable retirement lifestyle.

More employees and all pension contributors should understand that a pension is an investment. It’s a long-term investment in your future. The compounding effect over the long term is powerful for those who start contributing to pension plans early.

In the case of pensions in the private sector, contributors can invest a maximum of 20 per cent of their income and earn tax-free returns. Because the interest earned on the pension funds is not taxed, more funds are saved for the future as funds that should have been paid to the government as tax are instead added to the pension pool to create retirement income.

Any opportunity to legally earn tax-free interest on your investment should not be missed.

Pension funds are also tax-deductible and provide savings for the employee or contributor. Organisations that facilitate salary deductions for pension contributions will deduct the employee’s monthly contribution from their salary before calculating the amount of income tax (PAYE) to be paid.

Unfortunately, some adult workers are missing out on this form of tax relief. Even though pension funds are also tax-deferred, the power of compound interest at work for many years will outweigh the PAYE that is applicable when you retire. At retirement, you can take 25 per cent of your pension as a tax-free lump sum. The income tax threshold applies to the remainder.

Pension funds are not just tax-efficient, but allow for the diversification of assets, which is beneficial in reducing risks and maximising returns. Funds are invested in a mix of assets, such as stocks, real estate, bonds, mutual funds, and foreign currency.

It’s important to understand how these assets impact investment performance. Stocks are high-risk, but provide high returns over time, whereas bonds provide stability but low returns. Real estate offers both rental earnings as well as capital appreciation and serves as a cushion against inflation in the long term.

Pension diversification extends to regions and industries. Regional or geographic diversification can minimise the impact of any one country’s political or economic conditions on the pension fund performance. Diversification by industries refers to pension funds investing in different industries such as manufacturing, financial, and technology sectors. This form of diversification mitigates against poor performance or losses faced in one sector. Overall, diversification is necessary to provide long-term stability and financial security for members. Diversification strategies are reviewed regularly to ensure that accumulated funds offer optimal performance that will create a reliable stream of income for contributors who want to maintain their standard of living in retirement.

Regulations by the authorities protect the rights and interests of pension fund members. This makes the pension fund an important investment option for retirement planning. In Jamaica, the Financial Services Commission (FSC) is responsible for the regulation and supervision of the pension industry. Guidelines are in place to ensure that pension funds are managed transparently with focus on accountability and ethics that govern the financial security of members’ retirement funds.

Investing in a pension fund is one of the best opportunities to grow funds exponentially for retirement. I consider time to be pension funds biggest asset. Time is needed for funds to recover from short-term losses and market fluctuations and grow funds at compound interest. A pension account can be opened from the very first pay cheque with frequent contributions for up to four decades or more. Earning interest rates above the inflation rate is important in growing pension funds for retirement. Inflation’s role is to reduce the purchasing power of your retirement savings. Stocks have proven to beat inflation in the long term.

Financial literacy is crucial at every stage of life. Investing in a pension plan is a ticket to a lifetime income. The value of that income is key. If you are not yet retired, what will your retirement income look like? Author David Bach said: “It’s not what you know about money, it’s what you don’t know that will wipe you out.”

Grace G McLean is a financial advisor and retirement specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com.

Grace G McLean.

Real estate offers both rental earnings as well as capital appreciation and serves as a cushion against inflation in the long term.