Are you currently saving towards your retirement? If your answer is yes, do you know how much money your pension plan will provide when it’s time to retire? If your answer is no, do you have any idea where you’ll get money to meet your expenses when you’re too old to work?

If you’re worried about your responses to the questions above, it’s time to take a serious look at saving for your future: it’s time to get real about planning for your retirement.

Many Jamaicans have a high propensity to spend, living for immediate gratification with little thought for the future. Some of us would not blink an eyelid to spend J$500 on a fast food meal, but would be hard-pressed to put away that same J$500 into a consistent savings programme.

Some of us have a ‘No Problem, Man’ attitude, where we figure everything will work out just fine eventually. We presume that our children will take care of us when we get old; that we will be able to work forever; or that one day the lottery will come to our financial rescue.

It’s not okay to be oblivious about your money situation. To be financially smart, you must be honest about the state of your finances, be willing to seek advice, and be persistent in implementing suggested solutions.

As you’re reading this, if you know you have no retirement savings or you’re not sure what exactly your pension plan will provide, resolve to immediately take steps to take charge of your financial future.

So now that I’ve hopefully helped you to get real about retirement, how do you get going with a savings plan? The first step is always to seek professional advice from a financial planner. There are several institutions that provide this service free of cost. Last week we looked at the process involved in retirement planning, now let’s look at ways of saving for your pension.

There are three ways that you can build your retirement fund: contributions to the National Insurance Scheme (NIS), automatic savings in your workplace’s pension plan, and investments in a personal retirement account.

According to the Ministry of Labour and Social Security’s website, the NIS is a “compulsory contributory funded social security scheme, which offers financial protection to the worker and his family against loss of income arising from injury on job, incapacity, retirement, and death of the insured.” Employers are required to deduct 2½ per cent of the gross salary of all employees (up to a salary ceiling of J$500,000 per annum), while they contribute a matching 2½ per cent.

Want to plan for a stress-free retirement? CLICK HERE!

Self employed persons can make contributions at the rate of five per cent on gross annual income up to J$500,000. Although we have all heard stories of the small amounts received by NIS pensioners, for some people this might be the only source of retirement income. The NIS also provides other benefits, so it might be worthwhile contributing to the scheme if you are not already involved.

Most employees of larger and medium-sized institutions save in company-sponsored pension plans, where a portion of the gross income is automatically deducted. The company will match the employee’s contribution and invest in the plan as well. Employees are also allowed to save an additional voluntary contribution to their pension plan from pre-taxed income. Recent amendments to the Income Tax Act will now allow members of pension plans to save a maximum of 20 per cent of their income, inclusive of the employers’ contribution.

If your budget can afford it, it’s a good idea to save the maximum allowed in your pension plan. Pension deductions are tax-free, so you would not pay tax on that portion of your income that you put aside in the pension plan. Another benefit of pension plans is that the investment returns can be higher because no withholding tax is paid on the gains.

Here’s an example of how the 25 per cent withholding tax can make a difference: Let’s say you invest J$5,000 monthly for the next 25 years, increasing your savings by five per cent annually. If you save in a regular account and receive an average interest rate of 12 per cent per annum (before tax), you will have a lump sum of approximately J$8.5m. However, investing in an approved retirement plan will give you a 50 per cent bigger nest egg of over J$13.3m.

There’s also great news for self-employed persons who wish to invest towards retirement. The recent Income Tax Act amendments will now allow persons who are not contributing in a pension plan, to be able to save 20 per cent of pre-tax income in an approved individual retirement account (IRA), approved by the Financial Services Commission (FSC).

Another benefit of opting for an IRA when building your personal nest egg is that you can take advantage of the expertise of the fund managers. You don’t have to figure out which investments to select for the highest returns. There are a few institutions currently offering IRAs in Jamaica, with many more seeking FSC approval.

Next week we will take a look at what you can do if your savings effort won’t be enough to replace your income in retirement.