I recently read in an article on PFAs in Nigeria that most Nigerians do not have up to N500,000 in their retirement accounts. If that is true, it is saddening and points to a retirement savings crisis. Many people (Nigerians and non-Nigerians) do not want to think of or hear the word retirement because they are either not prepared or ill-prepared, at best.
But unless one dies young, retirement must come, and prepared or not, you will face the consequences of retirement and the lack of earning capacity that comes with it. If there is anything that should make anyone in Nigeria think about retirement and think about it seriously, it is the long queues of retirees waiting to be paid, some of them fainting and dying in the process. A picture, they say, is worth more than a thousand words.
When I saw the images and videos of Nigerian retirees sitting and lying on the ground as they “camped at Benue Government House”, I did not need to read the story to know how desperate the situation was. That images served as visual aids for a news article that appeared in the 12th September 2019 edition of Punch Newspaper titled, “Pension pains: Aged retirees camp at Benue Government House.”
Unemployment has made matters worse
Nigerians were not used to saving for retirement in the past because parents had always expected that their children would take care of them at old age. But with the alarmingly high rate of unemployment in the country, that thinking seems to have gone from reality to wishful thinking. Even at that, those who managed to save for retirement then did so through their workplaces under the defined benefit obligation scheme.
Unlike in those days when Nigerians had to save for retirement through the Defined Benefit obligation type of pension scheme, the pension reform of 2014 brought in the defined contribution scheme, which many have argued is better than the former.
A part of the reforms that have taken place in the Nigerian Pension Scheme is the introduction of voluntary contributions. By that introduction, the Pension Reform Act (PRA) 2014 allows employees to make voluntary contributions into their Retirement Savings Accounts in addition to their mandatory pension contributions. The objectives of the voluntary contribution scheme are to help employees to enhance their retirement benefits, to encourage retirees under the CPS, and to utilize part or all the voluntary contributions to augment their existing pension.
What is voluntary contribution?
Voluntary contribution is the non-obligatory contributions made by employees in the formal sector through their employers. In addition to voluntary contribution, the reform allows for additional voluntary contribution which is “non-obligatory contributions made by workers and retirees through the employer towards enhancing their pensions.”
Why make additional voluntary contribution?
There is need and reason for employees to take advantage of the additional voluntary contribution scheme. Some of the reasons include:
To protect against inflation: Inflation was on a downward spiral until recently when it spiked again in October. In spite of the downward trend in inflation, one obvious thing is that inflation, no matter how small, eats into your retirement savings. Additional Voluntary Contribution is one of the ways to boost your retirement savings by countering the effects of inflation.
Flexibility and choice: Another reason to engage in additional voluntary contribution is its flexibility and ease. All you need to do is inform your employer to make the required deductions from your pay for whatever additional voluntary contribution you want to make. The amount of voluntary contribution, unlike mandatory contribution, is not set in stone. Voluntary contribution can be any amount of your choice, so far as it is not more than one-third of your monthly salary and it comes from legitimate income. Because it is not mandatory, you decide on the frequency of the contribution, either monthly or quarterly.
Tax advantage: Voluntary contribution is better than an ordinary savings account in that the contribution is deducted from your salary, which makes it convenient and the deduction is before tax, which also reduces your tax liability. If you are patient enough to leave the voluntary contribution in the pension savings account for a minimum period of five years, you save even more on taxes because you do not get taxed at the point of withdrawal.
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Financial discipline: When you have money in your pocket or in your bank account with unrestricted access, you may not be able to resist the urge to spend. But when you do not have it, or you have it in an account that comes with restrictions in terms of time or penalty, you tend to manage whatever you have in your unrestricted account. That is financial discipline. By moving money from your unrestricted account to the restricted account by way of voluntary contribution, you are not only helping to ensure a good life at retirement, but you are also helping to discipline yourself in financial management.
Retirement savings is not a luxury reserved for the rich and the crème de la crème, it is a necessity. It is a friend of time, and the earlier you start, the better. Save more now for better living tomorrow.