No simultaneous membership in two approved pension arrangements
TODAY’S ARTICLE is inspired by feedback from a reader. Their concern is stated below. “I read your article that was published in the Sunday Gleaner on February 11, 2024 – ‘Retirement scheme another path to a pension’ – and I am grateful that I bought the newspaper that day. I have been a Government of Jamaica (GoJ) employee for eight years. Can you name the retirement schemes that I am eligible to pay into?
Your article opened my eyes, as this was unknown information due to the fact that I have always heard you cannot have two pensions as a GoJ employee.
SO.
My response:
Current legislation does not allow a person to be an active member of two approved pension arrangements at the same time, and there are two such arrangements – a retirement scheme and a superannuation fund, which is an employer-sponsored pension fund.
Nonetheless, it is possible for an individual to receive more than one pension in retirement. This can happen when the person who is a vested member of the employer’s pension fund ends that employment and moves on to another and becomes vested in its pension plan, or becomes a member of a retirement scheme.
The vesting rules of an approved pension fund determine if an employee will receive some portion of the contributions made by the employer on his or her behalf upon resignation, dismissal or some other form of termination of service.
It is common for employers to fully vest their employees after five years of service. In that case, the employee whose service ends after the designated minimum period of service is entitled to 100 per cent of the contributions made on his or her behalf and may choose to let the contributions remain to get a pension from the former employer, or to transfer the contributions to another pension arrangement.
If the minimum number of years for vesting has not been met, the employee is only entitled to his or her contributions, and may have them refunded or transfer them to another pension facility.
In any approved pension plan, members are vested in their own contributions and, when they end one employment, may opt to transfer them to another plan or a scheme, opt for a refund, or opt to leave them in the plan to secure benefits for retirement.
People who save for their pension through an approved retirement scheme (ARS), often described as an individual pension plan, do not have to wait to be vested. They are vested as soon as they make their first contribution.
The ARS is the facility available to the individual who opts for self-employment, and the individual can contribute up to 20 per cent of income, a sum which is not subject to income tax.
This option is also available to the person who opts to work for an employer who does not have an employersponsored pension plan, also called a superannuation plan. In this case, some employers choose to make contributions for the employee.
The legislation allows for the combined contributions of the employer and employee to be up to 20 per cent of the employee’s pay.
The employer’s contribution is vested in the employee immediately and cannot be refunded.
The main financial institutions licensed to offer the ARS are life insurance companies, commercial banks and credit unions, but it is important to note that, notwithstanding the similarities between the various pension arrangements, ultimately, it is the plan rules which dictate what is permissible.
You should not allow yourself to be put off because you are not able to be an active member of more than one pension arrangement simultaneously. There are other means to accumulate additional funds for retirement. For example, there are unit trusts and mutual funds, managed investment portfolios, and self-managed investment portfolios.
Perhaps you could channel the funds you thought you would have been able to put into another pension arrangement into one or more of these facilities. Unit trusts and mutual funds are quite similar. They provide a range of diversified professionally managed portfolios to investors.
These funds are not customised to the needs of individual investors, but investing in carefully selected funds can help to create a satisfactory portfolio.
Managed investment portfolios are offered by professional investment managers for a fee. Although some create customised portfolios for their clients, others tend not to. Self-managed portfolios require a good knowledge of investment techniques and investment instruments, so they are not suitable for everybody.
Tax-efficient investment instruments are very beneficial to the investor. There is no capital gains tax on equities, but they are among the more risky investment instruments. Diversification can be used to reduce risk, though.
Capital growth unit trusts and mutual funds also have a tax advantage, but the risk factor has to be borne in mind. Taking a longterm approach can smother some of the risks. And, bear in mind that there are other options that carry less risks, for example, interestbearing securities and pooled funds that invest primarily in them.
Although you cannot be a member of two approved pension arrangements at the same time, you can use a good investment portfolio to give you an additional stream of retirement income.