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When you are in your 20s and 30s, retirement may be the last thing on your mind. Many of us don’t like to face the fact that we are getting on and it is easy to put off taking concrete steps as retirement still seems so far away.

Ideally, you should start planning for retirement as soon as you start your first job. Those who start saving for retirement in their 20s have a better chance of building a large nest egg. Saving even a small amount on a regular basis can add up to a tidy sum over a long period of time and this will enable you to maintain the standard of living that you would have become accustomed to by the time you retire.

The Pension Reform Act 2004

Most people are not saving, or certainly not saving enough for retirement. Thanks to the Pensions Reform Act, 2004, we have all become aware of pensions, and retirement planning. Don’t just brush it aside and think it doesn’t apply to you. It may be one of the most important financial decisions you will make this year.

In a nut shell, the key objectives of the new scheme are to ensure that all employees in the Federal Public Service, the FCT and the private sector where the institution has 5 or more employees, receives his or her retirement benefits as and when due. It is largely voluntary for other categories of employees. It also assists improvident individuals by ensuring that they save to cater for their livelihood during old age.

A fully funded contributory system

Under the pension scheme, which is contributory and fully funded, employees and employers contributes a minimum of 15 per cent of the employees’ total emoluments (basic salary, housing and transport allowances). An employer may choose to bear the full contribution subject to a minimum of 15 per cent of the employees’ monthly emolument. Employees may opt to make additional voluntary contributions to augment their retirement savings. Both contribution and retirement benefits are tax-exempt.

The contributions are deducted at source from the salary of the individual and transferred to the relevant Retirement Savings Account (“RSA”). When you are handed your first pay slip, the deductions may seem alarming, but do remember that a few years down the line, they may represent significant savings that many of us lack the discipline to accumulate on our own.

Carefully select a Pension Fund Administrator (“PFA”)

You are responsible for selecting your Pension Fund Administrator (“PFA”) and this decision is of immense importance as the accumulated balance in your RSA largely depends on how well your PFA invests your contributions; the PFA’s job is to administer the contributions and invest in a manner that should safely ensure reasonable returns.

Your PFA will select an asset allocation mix that may include mutual funds, stocks, bonds, money market, or other investment instruments. The National Pensions Commission (“PenCom”) ensures the prudent management of pension assets through supervision and regulation.

Choose a PFA with an experienced investment management team; a sound parent company with a strong performance track record gives additional comfort. Other important issues include a large network of branch offices, outstanding customer service and retirement planning advice, and its application of state-of-the-art information and communication technology.

Your Retirement Savings Account

As an employee you are expected to open a Retirement Savings Account with a PFA. Your RSA belongs to you throughout your life, and is protected with the use of usernames, passwords and PIN numbers. Your RSA is portable so can be moved from one job to another and should you be dissatisfied with the level of service or investment returns that your PFA provides, you may opt to switch houses.

How do you make withdrawals from your RSA?

You can make a lump sum withdrawal from your RSA at age 50 or upon retirement whichever is later, provided that what is left is enough to procure an annuity from a life insurance company or fund a programmed withdrawal that will generate at least 50 per cent of your last monthly salary at retirement. Voluntary Contributions can be withdrawn as a lump sum at any time.

Three months ago, Titi was affected by a restructuring exercise carried out by her company. She is not yet 50 years old and so is not entitled to a lump sum payment. She needs some money to tide her over so contacts her PFA.

Tito will be able to access her RSA if she is not able to gain employment within six months from the day she left the company. She will be entitled to 25 per cent of her RSA as a lump sum while the balance will be paid to her as a programmed withdrawal over her life time when she attains the age of 50 years.

The rationale is that retirement benefits are to cater for your life in old age when you can no longer work, so paying out all of it before you are 50 years old may affect you in your old age.

Will your pension be enough?

Do bear in mind that pensions, whilst they are an important part of your retirement income, are not intended to meet all your retirement needs. Even though both your pension contribution and retirement benefits are tax-exempt, you should spread your retirement savings across deposits, bonds, stocks and property. It is important that investment choices at least keep pace with inflation.

After several years of hard work, raising a family, and hopefully, building your nest egg, your retirement years should be one of the most rewarding of life’s stages. The responsibility for building your nest egg and ensuring that it supports you for the rest of your life lies with you. Make saving for retirement a priority and start now, whatever your age.