Pension Insight: Contributory pension scheme — workers’ guide to preparing for retirement

As the Nigerian workforce continues to grow and evolve, so does the importance of adequate preparation for retirement. For workers enrolled in the Contributory Pension Scheme (CPS), the key to a secure and fulfilling retirement lies in making informed financial decisions earlier rather than later.

With retirement planning being the responsibility of every individual, this article aims to equip workers with essential knowledge on navigating Nigeria’s CPS to ensure a prosperous and worry-free retirement.

The CPS, established by the Pension Reform Act 2004 (PRA 2004) and later repealed and replaced with PRA 2014, is designed to provide a sustainable and efficient retirement savings structure for Nigeria’s public and private sector workers. This CPS encourages active participation from both employers and employees, ensuring a substantial retirement fund for workers.

In an era where economic uncertainties loom large, Nigerian workers must be proactive in their preparation for retirement. Under the CPS, workers can take control of their financial destinies and embrace retirement confidently. The CPS offers a practical framework for workers in Nigeria to build adequate savings for their retirement.
Although enrolling in the CPS is a significant leap towards happy retirement, workers must adopt a proactive approach to secure a comfortable and financially stable future. Here are some essential steps to consider when preparing for retirement under the CPS:

START EARLY, BENEFIT MORE

One of the most crucial aspects of retirement planning is to start early. The earlier a worker enrols in the CPS, the more time their money has to grow through compound interest. Even a modest monthly contribution can accumulate over the years, providing a sizeable nest egg for retirement.

DETERMINE RETIREMENT GOALS

Workers should envision their retirement needs and set clear goals regarding pension savings. Understanding how they wish to spend their golden years will help shape savings targets and investment strategies. Workers may consider additional contributions to shore up their retirement savings towards a high pension in their golden years. The PRA 2014 allows workers to contribute more than the 8 percent minimum and employers to contribute more than the 10 percent minimum, if desired.

UNDERSTAND THE CPS

Workers need to thoroughly understand the details of their pension plan by familiarising themselves with the minimum contribution rate, multi-fund structure used by pension fund administrators (PFAs) for pension assets allocation, etc. They may also seek assistance from their employer’s human resources department or pension fund administrators (PFAs) to clarify any uncertainties and make informed decisions about their retirement savings.

STAY INFORMED ON PENSION-RELATED POLICIES

As the National Pension Commission (PenCom) periodically reviews and updates pension regulations, workers must stay informed about any changes that may impact their retirement savings. It is necessary to keep abreast of pension-related news and consult financial experts to ensure compliance with the latest developments. Workers may also benefit from policies such as the one allowing workers to use part of their retirement savings to pay equity contributions for residential mortgages.

RESIST THE TEMPTATION TO WITHDRAW EARLY

The CPS is designed to provide financial security during retirement. While certain situations may arise, such as emergencies or unforeseen financial strains arising from job loss or health challenges, workers are advised against early withdrawals from their pension accounts. Early departures can severely diminish the potential growth of your retirement savings and jeopardise your future financial security. To maximise the power of compounding, workers should not dip into their pension funds before retirement, except under critical circumstances such as permanent incapacitation.

SEEK PROFESSIONAL ADVICE

Retirement planning can be complex, especially when navigating investment opportunities. Consulting with your PFA or a qualified financial advisor can provide personalised guidance, ensuring that workers make informed decisions aligned with their goals in terms of pension at retirement: programmed withdrawal or annuity. Your PFA can also guide you on lump sum decisions.

CONSIDER SUPPLEMENTARY RETIREMENT SAVINGS

While the CPS is a crucial component of retirement planning, exploring additional savings options such as savings accounts, real estate investments, and mutual funds can provide further financial security. It is imperative for workers to make other preparations for retirement as additional income, aside from pension, is desirable for retirees.

Preparing for retirement under the CPS requires proactivity, financial literacy, and discipline. Embracing these principles will benefit individuals and contribute to a stronger and more financially resilient Nigerian society. Therefore, let us take charge of our financial future for a rewarding retirement.

Based on information by the National Pension Commission (PenCom)