Thread by @elevationng

1. Hello and welcome to another edition of #Elev8day! Today, we'll be providing answers to some "Common Pension Questions".

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2. As part of the onboarding process on my first job, I was told to open a pension account. I stayed on that job for 18-months and I never got to open a pension account. It certainly wasn't an oversight. So how did it happen?

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3. Growing up, my image about pension was seeing old people on queues in front of government offices protesting the non-payment of their monthly pensions. With those images inked on my mind, I resolved never to be in such a position.

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4. So I thought to myself – “what is the point of a pension account? After all, I'd be so rich by that time that I wouldn't need any pension money.

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5. Sadly, what I should have known was that I was pretty much throwing away free money. What a paradox! I wanted to be rich and here I was throwing money away.

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6. The irony of it all was that I was working in Finance and ought to know this but for some reason, I dropped the ball on that one.

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7. What should I have known?

A pension is an investment account into which a person and their employer(s) make regular payments during their working life and from which they intend to draw regular income when they retire.

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8. It's somewhat like a massive piggy-back you get to break when you retire.

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9. In Nigeria, the operation of the pension industry is governed by the Pension Reform Act 2014 (PRA). The act established a Contributory Pension Scheme (CPS) that requires that workers make a minimum monthly contribution of 8% of their monthly emoluments

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10. (i.e., monthly basic salary, transport allowance and housing allowance) into their Retirement Savings Account (RSA). Also, the employer is mandated to make a minimum monthly contribution of 10% of every employee's salary.

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11. Case in point, Thelma works with Alpha Ltd and earns N1 Million every month. Thelma and Alpha Ltd will contribute N80,000 and N100,000 respectively into Thelma's RSA account.

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12. This money is then managed by a Pension Fund Administrator (PFA) who invests to grow the contributions in your RSA, such that every employee has sufficient funds to last through their retirement years.

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13. By law, participation in the CPS is mandatory for public sector workers and workers in private companies with more than 15 employees.

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14. Self-employed individuals and workers in private companies with 14 or fewer workers can participate in the Micro-Pension Plan (MPP) that was recently launched in 2019. The MPP and the CPS operate under very different terms.

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15. How are the pensions managed?

Every participant in the CPS is required to open an RSA account with one of the PFAs in the country. It is into this account that your pension contributions are credited.

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16. The PFA takes the funds along with those of other contributors and invests them, based on approved guidelines, in government bonds, shares of public companies, real estate and other approved investments.

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17. What happens when you change jobs?

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18. You simply pass on your RSA account number to your new employer. In addition to the balance in your RSA account from your previous employer, your new employer would continue to make the required monthly pension contributions into the account.

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19. How can you access the funds in your RSA account?

As a contributor, you are not allowed to access the funds in your RSA until you retire or attain the age of 50 years (whichever is later).

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20. However, there are a few exceptions to this general rule – health challenges, early or mandatory retirement.

If an employee retires before the age of 50 years due to mental or physical incapacity, they can have immediate access to their RSA.

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21. Also, in the event of mandatory retirement, you can immediately access the funds in your RSA.

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22. But if you lose your job or retire under the age of 50 years per the terms and conditions of employment, you will be able to access only 25% of the funds in your RSA after six months if you don't secure another job.

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23. How do you utilize the funds in your RSA at retirement?

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24. Upon retirement, you can withdraw a lump sum from the total amount in your RSA, provided that the amount left after the lump sum withdrawal is sufficient to procure a ‘programmed fund withdrawals or annuity for life’.

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25. You can also elect to receive a programmed monthly or quarterly withdrawal calculated based on the expected life span or you can use it to purchase an annuity from a life insurance company.

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26. What are the benefits of this pension arrangement?

Contributions into your RSA account are tax-exempt i.e. you do not pay tax on the portion of income that goes into your RSA account.

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27. Also, unlike the previous pension system where people queued in front of government offices because there was no money to pay them, this new scheme is fully funded so upon completing the necessary paperwork you would get your money upon retirement without hassle.

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28. Can I make additional contributions into my RSA account above the statutory minimum?

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29. It is possible to make additional voluntary contributions into your RSA account, but these contributions must not be more than your salary and must be contributed via payroll of your employer.

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30. However, unlike the mandatory contribution which can only be accessed on retirement, it is possible to withdraw 50% of voluntary contributions as long as the contribution has been held in the account for at least 2 years.

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31. Though any additional contribution would be tax-exempt when the contribution is made, you may face some taxes when withdrawing it under certain conditions.

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32. What happens if your employer does not remit your pension deduction into your RSA account?

It is illegal for an employer to make late remittance or fail to remit pension contributions.

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33. If such an action becomes known to the authorities or is reported, such would have to pay the amount due plus a penalty not less than 2% of the amount due.

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34. How can I know what is happening with my RSA account?

The PFA that manages your pension contribution is required to issue you a monthly statement of account that reflects the remittances made by your employer as well as the profit from investments.
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35. This statement may be available online if you aren't receiving a physical copy.

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36. What happens to the pension contribution in the event of demise before retirement?

Upon the demise of an RSA holder, the beneficiary or any other person as may be directed by a court of competent jurisdiction would be entitled to the balance in the RSA account.

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37. Can I change my PFA if I don't like the service I am getting?

It is technically possible to move your RSA account once a year, from one PFA to another without giving any reason(s). However, the transfer window is yet to be opened.

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38. Given the CPS caters to workers in the formal sector, what happens to workers in the informal sector?

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39. To cater for self-employed individuals and people working in organizations with less than 14 employees, a Micro-Pension Plan that operates under slightly different terms was created.

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40. Under the Micro Pensions Plan (MPP), employers are not required to make contributions into the RSA of an employee. Contributors make remittances based on their aspiration and financial capacity either daily, weekly, monthly or as may be convenient into their RSA.

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41. How are contributions and withdrawals managed under the Micro Pension Scheme?
Contributions under the MPP are split into two comprising of 40% for contingent withdrawals and 60% for retirement benefits.

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42. As a participant, you have access to 40% of the total funds credited into the contingent fund whilst the remaining 60% which is held in the retirement benefits fund can only be accessed at retirement and upon attaining the age of 50 years or on health grounds.

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43. What happens if a contributor in the MPP gets formal employment?

If a contributor gets employment within the formal sector, the contributor would be able to transit into the CPS upon meeting the relevant conditions.

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44. How safe are contributions made into your RSA account?

Apart from the PFA that manages the pension assets on your behalf, there is a Pension Fund Custodian (PFC) that has custody of the pension funds and assets.

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45. Such that even if your PFA were to be wound up or liquidated, your investments would still be securely held. Also, PFAs and PFCs are well regulated and required to maintain a statutory reserve fund.

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46. How much income would you get from your RSA upon retirement?

Although the PRA provides for a guaranteed minimum pension - a minimum amount that a contributor would earn as a monthly pension

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47. - the final amount in your pension pot as well as the monthly pension you would receive in retirement depends on how well the investments made by the PFA perform.

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48. Put together, the CPS and MPP are solid options to provide some income for you when retirement sets and should be embraced.

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49. However, given that there is a risk that you could end up with less than you expect in your RSA, it is prudent to make other plans to generate additional income for your retirement.

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50. That’s it for today on #Elev8day! Thank you for following, participating and RTing, do join us next week Tuesday at 5pm for another exciting edition. Until then, ensure to always make the right financial decisions!

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