An annuity is a stream of payments made in fixed intervals over time. There are different types of annuities. Fixed or increasing annuities are two types. Usually when someone retires you hear them say “I have an annuity”. What this means is that they have a source of income being paid periodically (monthly or quarterly) for a specific period. In many cases it is paid for life.

An approved retirement scheme is a private pension arrangement. It allows employed Jamaicans who do not qualify for participation in an employer-backed pension fund as well as self-employed Jamaicans between the ages of 18-69 to formally contribute to a pension plan. Through an approved retirement scheme (also called or individual retirement scheme or approved retirement account), contributors can save up to 20% of their income in a tax-advantaged savings plan that will provide them with an income in retirement. Approved retirement schemes are defined contribution plans.

A superannuation fund is typically an employer-sponsored pension fund that provides a future benefit in the form of a retirement income for an employee. Contributions are generally made by both the employer and the employee. They are pooled and invested on behalf of employees and the earnings generate income for employees upon retirement. This income is paid through an annuity. Superannuation funds can be either defined benefit plans or defined contribution plans.

A defined benefit plan is one in which the contributor is guaranteed a fixed annuity or value in retirement regardless of the performance of the underlying investment. If the assets of the plan are insufficient to pay the pre-determined pension, the employer or company to which the plan belongs is liable to pay the difference or short fall. A defined benefit plan is more commonly a part of a superannuation plan structure.

A defined contribution plan is one in which your pension benefit is determined by the performance of the underlying pool of investments.

The vesting period refers to the period of employment that is required to be completed in order for employees to have access to any money that is contributed on their behalf. In a defined contribution plan this refers to the employer’s matching contributions, while in a defined benefit plan this means the benefit in excess of their contributions. Once the employee completes the vesting period they are referred to as vested.

Every plan has a unique vesting period. However, a 5-year vesting period is most common in Jamaica. It is therefore important to check your plan’s documents.