Reading this, you should be interested in you’ll be able to start a pension plan and what plan is it that is the right one that is suited for you under the Contributory Pension Scheme (CPS).
An informed understanding of the varied pension products will assist you to make the proper decisions. Whether you’re employed within the private or public sector, or self-employed, there’s a product that is tailored for you. Let us dive right in.
1. Mandatory Active Contributory Pension Plan
The contributory pension scheme works for everyone, whether in the private or public sector. Under this scheme, you’re eligible for a Retirement Savings Account (RSA) once you work in an establishment with 3 or more employees. Irrespective of your pay, your employer is expected to deduct and remit a portion of your salary to your preferred PFA at the end of every month.
A retirement savings account is a dedicated account that allows monthly contributions from you and your employer. The amount contributed is usually between 15%-20% of your salary.
Your RSA acts sort of a bank account, except that contributions are made automatically into it. Meaning that you don’t have to worry about deducting the money from your bank account every month as this is done for you by your employer.
Moreso, the difference between a savings account and an RSA is that your contributions are invested in financial instruments to yield profits, which protects your pension fund from inflation.
2. Voluntary Contributions (VC)
The Voluntary Contributions is an additional contribution plan and it is optional. You can use this opt-in for this scheme in addition to having a contributory pension scheme. With this, you can make more contributions to your pension fund. This scheme is also more flexible. Unlike the RSA, your contribution can be made monthly, quarterly, biannually, or even weekly. Your employer would need to be notified if you choose to opt-in for this option. However, your VC cannot exceed a third of your monthly emoluments.
3. The Micro Pension Plan (MPP)
In 2014, the Micro Pension Plan was introduced to make provision for self-employed individuals. This plan allows for more flexibility for entrepreneurs, traders, professionals, and other self-employed persons that don’t qualify for the contributory pension scheme.
If you’re self-employed, this is the plan you should opt-in for.
4. Cross-Border Pension Arrangements
So far, we have highlighted pension plans for people who live in the country. But what happens if you are outside the country?
If you live outside the country, you are not left out. The cross-border pension arrangements enables Nigerians who are employed outside the country to make contributions to the pension fund. Your Retirement Savings Account will be denominated in Naira as well.
5. Employees’ Retirement Plans
This plan still falls under the Contributory Scheme and is meant for retirees. As a retiree, you are not high-risk tolerant. Therefore, your pension fund will be invested in financial instruments that are low-risk, mainly fixed income instruments such as corporate or government bonds.
You are automatically eligible for Programmed Withdrawal, enabling you to receive your pension periodically either monthly or quarterly from your PFA. Otherwise, you can opt for Annuity with a Life Insurance company if you so wish.
Another option is that you can make a withdrawal in a lump sum if your total pension fund is not more than ₦550,000, although this value is currently being reviewed upward by PenCom to align with current realities.
6. Institutional Pension Fund Management
This product is available to corporate bodies and sub-national Governments to manage and administer their pension obligations. The PFAs offer this specialised service to corporates and governments, borrowing from their expertise in the management of pension funds.
Your golden years are a special time in your life. It’s important that you make the informed decisions about your retirement plan so you can live out those years to the fullest.
The Pension Fund Administrator (PFA) you choose also goes a long way to ensure that your financial needs are met during retirement.