As a Retirement Savings Account (RSA) holder under the Contributory Pension Scheme (CPS), there a ways you can plan for a higher pension in retirement.
This involves a combination of strategies that will enable you to grow your contributions and avoid eroding the value of what you get at the point of retirement.
These strategies according to experts are by leveraging growth opportunities for the fund and avoiding some of the things that could erode the value of your RSA balance.
According to what the National Pension Commission (PenCom) describe as ‘Path to higher Retirement Pensions, the four strategies are High Contributions, Length of Contribution, Lump Sum Withdrawals and Personal Choices.
High Contributions:
The CPS provides for a minimum rate of contribution of 18 percent of the employee’s monthly emoluments, where the employer contributes 10 per cent and the employee 8 per cent. However, the employer may decide to bear the full responsibility of the contribution provided it is not less than 18 percent of the monthly emolument of the employee.
According to PenCom “The more you and your employer contribute, the more you get in retirement”.
To achieve a higher pension in retirement, an employee may decide to make additional contributions above the minimum 8 percent, and this is called voluntary contribution (VC).
Voluntary Contributions are extra funds you can opt to add to your mandatory pension contributions, or simply set aside as retirement savings. These funds would be deducted from your monthly emolument by your employer and remitted into your RSA, along with your regular pension contributions, according to analysts at ARM Pensions.
VC differs from other regular savings you may have, as it is deducted from your salary before tax. This is a significant advantage of the VC, as the contributions have tax incentives and could lower your overall tax liability.
The more you contribute now, the larger your retirement savings can grow due to compound interest, a pension fund administrator(PFA) said.
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Length of Contribution:
Contributions under the CPS have shown that the longer you save while working, the more money you are able to save at the point of retirement.
PenCom said, “The longer you contribute, the more your savings grow”.
“Piece by piece, a mansion is built. Relentlessly pursue excellence so that the result is a testament to all your dedication and hard work, according to the Pension Fund Operators Association of Nigeria (PenOp).
“Play your part and let the result be the testimony of your efforts”.
PenOp said also “Pension and retirement planning cannot be started early enough; we can’t always afford to leave our later years comfort to chance.”
By planning ahead and making informed decisions, you can enhance your financial security and enjoy a more comfortable retirement, they said.
Lump sum payments:
Lump Sum payment is a provision in the Pension Reform Act 2004, as amended in 2014.
“Upon retirement, an employee can draw a lump sum (by whatever name called) from the balance standing to the credit of his/her Retirement Savings Account (RSA) provided the balance after the withdrawal could provide an annuity or fund monthly payments that would not be less than 50 percent of his monthly pay as at the date of his retirement.”
As at the end of 2023, the sum of N964,239.47 billion has been paid to 33,201 retirees under programmed withdrawal and N665.13 billion paid to 111, 708 retirees under life insurance annuity, according to PenOp.
While a lump sum is good, avoid taking it if you don’t really need it because the more you leave it, the more money you accumulate as a pension in retirement.
“If you think you might want to top up your pension pot in the future, then you need to be aware that taking money out in lump sums could affect the amount you can receive in retirement, according to Fidelity International.
According to PenCom “Taking out a large sum at retirement can reduce your monthly pensions”.
Other reasons for lump sum before retirement are temporary loss or exit from work, voluntary or mandatory retirement, and retirement due to medical reasons.
Personal Choices:
Choosing the right funds from the multi-fund structure can lead to higher returns, according to PenCom.
The Multi-Fund structure was introduced through the enactment of the Pension Reform Act (2014) and the amendment of the Regulation on Investment of Pension Fund Assets in 2018 PenCom.
It was meant to give some flexibility to RSA holders on how they want their pension assets to be managed and take into consideration their risk appetite.
The Multi-Fund structure aims to align the age and risk profile (tolerance level) of RSA holders.
Accordingly, the multi-fund structure comprises Fund I, Fund II, Fund III, Fund IV (Retiree Fund), Fund V (Micro Pension Fund), and Fund VI (Active and Retiree) – the Sharia Compliant Funds. Funds I, II, III, IV, V, and VI differ among themselves according to their overall exposure to variable income, conventional, and sharia-compliant instruments.
It should be noted that RSA holders are by default assigned to Fund II at the point of entering the scheme. They are moved to Fund III from Fund II and Fund I once they attain fifty (50) years of age, and subsequently to Fund IV when they retire from active service, according to experts at Veritas Glanvills Pensions Limited.
However, modalities have been put in place for RSA holders who desire to move from Fund II to Fund I or from Fund III to Fund II. RSA holders in either Fund I, II, or III who want their pension contributions invested in Sharia-compliant instruments can elect to move to Fund VI Active, while those in Fund IV can opt for Fund VI Retiree. All the movements can be effected in line with the criteria stipulated by the PenCom guidelines, the expert said.
