Do Nigerians really have money in Pension?
There is a popular misconception about saving for the future, particularly through pension schemes. Those who save for the future start to count their loss at the point of making those savings given a number of factors, hence, it is a wise decision to rather invest for the future. This article is to enlighten Nigerians on finance and value of money saved or sometimes invested.
As people develop through their lifetime they have an expectation that a time will come when they will have to retire. For some people, pension is sufficient to provide a basic level of income.
Results from research studies revealed that complete retirement leads to a 5-16 percent increase in difficulties associated with mobility and daily activities, a 5-6 percent increase in illness conditions, and 6-9 percent decline in mental health, over an average post-retirement period of six years.
It is expected that when people retire they will experience a reduction in income – a pension makes up for some of this loss of income upon retirement. Pension schemes can provide protection in the form of lump sums for the pensioner or to his/her dependants in the event of death. In order to encourage pension schemes, governments provides tax relief on contributions made to pension schemes and the growth in their investments. Pension savings may lead to deeper and more efficient capital markets. Pension savings directly increase funds in capital markets available for private investment. In addition, deeper capital markets may lead to better allocation of capital, thereby improving overall efficiency and economic growth.
Although these are some of the reasons and benefits of subscribing to pension plans. On the contrary, there are other things that you are not told. This is why at Muna Real Estate, our mission is your prosperity. We implore people to make wise investment decisions at earlier stages of their lives so as to avoid the huge mistakes most people do not even realize they are making and continue to make. We will review a few things: Control, Inflation and Depreciation.
Control – Given that your pension will be invested in stocks and shares, there will be a fair bit of risk involved. Of course, if your pension investments do perform terribly for a while, the good news is that if you’re still far off retirement, there’s plenty of time for those investments to bounce back. What’s more, you will be able to acquire more shares for your money in a falling market. So, this may work to your advantage, but if you are approaching retirement and your pension scheme is performing badly, it can be extremely worrisome.
That said, most pension schemes use ‘life styling’ – a process where your pension money is automatically moved out of shares and into a lower risk investment such as fixed interest bonds and/or cash as you come closer to retirement age.
One of the biggest fears is also misappropriation of funds and terrible investment decisions made by those who control or have access to pension funds. The big question is: do you have control over this pension fund? The sad answer is NO.
Inflation on the other hand increases the price of goods and services over time, effectively decreasing the number of goods and services you can buy with money in the future as opposed to that same amount of money today. If your earnings remain the same but inflation causes the prices of goods and services to increase over time, it will take a larger percentage of your income to purchase the same good or service in the future.
To mitigate this decrease in the time value of money, you can invest the money available to you today at a rate equal to or higher than the rate of inflation.
Another big question is: the annual interest on pension, is it higher or lower than the annual inflation in the market? The sad answer is NO.
There is the depreciation of cash saved due to the opportunity costs associated to the wait period and also due to inflation. There is also depreciation of currency – currency depreciation is the loss of value of a country’s currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained.
The time value of money is the concept that money you have now is worth more than its incremental face value in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. Contrary to this principle pension lasts for more than 20 to 30 years and pays averagely two percent interest while inflation is well above 12 percent annually.
The wise decision is to consider alternative investments you can go for instead of pension funds, like rental properties that provide positive cashflow. It is very important that investors and young people understand that there is positive and negative cashflow—you might have positive cashflow but in terms of the value of the cash, you might actually be in a negative cashflow. The light at the end of the tunnel is IPPP (International Property Pension Plan) for you and for your family’s future.
Munachino Obinna Eze is a real estate investment Analyst with a track record of multiple property investments for clients in various countries.