Tesi Johnson, Freelance Reporter
THE FIVE per cent portion of your salary that you pay into your company's pension scheme is not the maximum allowance you may invest. The law actually permits you to pay an additional five per cent of your salary into a pension fund. Therefore, for one may opt to make additional voluntary contributions to one's pension scheme, which will entitle one to extra benefits.
It makes sense to contribute that additional five per cent for the following reasons:
Pension contributions are deducted from your pay before tax, giving you automatic tax relief. The extra contribution will receive the same tax treatment as the compulsory contribution, so you may retain a portion of your salary that would have otherwise been taxed.
The future is uncertain, so the income you receive now is not guaranteed for tomorrow. It is advisable that you invest heartily now so that your returns in the future will be greater.
Inflation, in particular, is known to be a big threat to pension income as it erodes the value of your benefit over time. Paying over the extra contribution may act as a medium of indexation against the effects of inflation.
Your post-retirement income receives more favourable tax treatment than income derived from other sources.
In a defined contribution scheme, the amount of your benefit is not guaranteed. The law requires your sponsor to contribute only so much and no more, leaving you with the responsibility of building your fund.
Some employers actually match the extra contribution that you make by also making an extra contribution.
Do not wait until you are nearing retirement, when your fund appears to be insufficient, to make additional contributions. It may be tempting to consume all your income now, but sound financial planning involves making sacrifices in order to preserve your financial security for the future. Keep a keen eye on the progress of your fund and invest more into it if you wish to live comfortably through your golden years.
Taken from The Sunday Gleaner, January 29, 2006
