We have read in the local print media about the dislocations taking place across our beloved island as companies effect various strategies to deal with the global economic crisis and its debilitating impact on our local economy.

One of the tragedies of the global economic crisis is the people who are now out of work, having been made redundant or their services, some after decades, terminated.

These persons who were members of a pension plan are, to a large extent, being refunded those contributions.

For persons with many years of service, this refund could represent a sizeable sum of money.

The terminated worker can choose one of four options:

1 A refund of your contributions.

2 Request that the trustees transfer or 'port' the value of your account to the pension plan of your new employer, if your new employer has a pension plan.

3 Have the trustees port the contributions to an individual retirement scheme/individual retirement account. This is especially important for persons who expect to be self-employed or employed under contract, as it allows for the continuation of retirement savings with the same tax benefits afforded a pension plan.

4 Persons who are vested could also request to become deferred pensioners, which means that they would leave their contributions in the pension plan and begin to receive a pension at the retirement date allowed under that pension plan. You could also request and receive a refund of the additional voluntary contributions made and still be entitled to this benefit. However, to qualify, your compulsory contributions must remain.

The first option for a lump-sum payment might appear attractive, but it could end up impacting your standard of living at retirement.

There are three mechanisms/incentives used by countries for encouraging persons to save for retirement.

Contributions are tax deductable. Since your pension contribution is taken out before income tax is computed, this lowers your income-tax payable.

Investment gains are tax free once invested in either a pension plan or a retirement scheme. This tax-free benefit, when compounded over many years, makes a significant difference to your accumulated savings at retirement.

Pension benefits payments would also get relief/exemption from income tax.

major disadvantages

But there are also three disadvantages to requesting and receiving a refund.

One of the main tax-free vehicles for retirement saving in Jamaica is through your pension plan. There-fore, if terminated and your accumulated contributions are refunded, these monies if reinvested will be taxable. They will not receive the same tax benefits afforded under a pension plan. (See table below.)

A lump sum of $500,000 invested at 20 per cent yields $19.2 million in 20 years under the tax-free option as compared to $8.1 million under the taxable option. This difference is significant and is attributable to compound interest, which many call the eighth wonder of the world.

Second, persons should be aware that in order to earn the maximum pension, they must have been a member of a pension plan for 37.5 years - called pensionable service. If your pensionable service is reduced, your maximum pension at retirement will be reduced accordingly.

Therefore, if pension contributors were to take a refund at termination of employment, they would be disenfranchising themselves from the ability to maximise their pension cheque at retirement, the period when it is most needed.

Third, in all pension arrangements, your employer is required to make contributions each month. In many instances, especially in defined contribution plans, your employer makes a matching contribution equivalent in value to your compulsory or basic contributions.

However, while persons who are vested will be entitled to this contribution, it will never be paid via a cash refund but can only be accessed on retirement or death, where it will be utilised towards procuring your monthly pension payments to either you or your spouse.

This contribution of your employer accumulated over many years will represent a sizeable sum which persons are leaving behind when they request a pension refund on termination.

We encourage plan members to consider the advantages of the options explained above in the event of termination of employment and to seek to maximise the tax benefits afforded pension plans and retirement schemes.

Rezworth Burchenson is managing director of Prime Asset Management Limited.

rburchenson@primepensions.com