I promised to bring the sequel to the first article on the seven thieves of your pension benefit. This time we are looking at six other thieves of your pension benefits. The factors below have proven to deprive individuals of their optimum pension benefits.
I wish to reiterate that, the thieves act in two ways;
- loss of money from the pension fund portfolio as a result of pension investments going wrong.
- Opportunities lost for income into your fund. These are losses you may never know because you didn’t know you could earn them in the first place.
- Late contribution
This is a deadly ‘thief’ of pension benefits. The deadlier part is where you do not have an idea how much money you have lost in investment returns. It will remain an opportunity lost, and which cannot be recovered.
For the defined-benefit schemes (SSNIT-1st tier, CAP 30, GUSS), contributions will count towards accumulating ‘points’ which is used to arrive at your benefit. Your benefits depend a lot more on the level of pensionable salary from which the contributions are derived. not necessarily on the amount of money you contributed and accumulated.
However, for the defined-contribution schemes (2nd and 3rd tier schemes), your benefit will depend on the quantum of funds accumulated and investment returns less the cost of management. Therefore, investment efficiency is key.
If remittance of contributions to trustees delay, investment of the funds will subsequently delay.
Any number of days lost in the employer holding on to the deducted contributions is a loss to the contributor. Likewise, if the self-employed delays their own contributions, they delay the investment of their own money. If funds are invested 10 days after deduction, the fund loses ten days of potential returns. This is a big loss! If this happens throughout the year, it translates to 120 days of lost investment for each month’s contributions.
The error usually committed here is that the ACT 766, stipulates the 14th day of the ensuing month at the deadline of remitting pension contributions to SSNIT. The ‘14th day’ mentality has been carried on to the 2nd and 3rd tiers which depend on good returns, and therefore the earlier they are invested the better.
Below a tabular illustration of investment days gained/lost:
|Schemes||Date Contributions were deducted||Date of Payment of Contributions||Inv. days gained by A and lost by B (Monthly)||Inv. days gained by A and lost by B (Yearly)||Inv. days gained by A and lost by B (5-yr period)|
|Scheme A||28th March||30th March||10||120||600|
|Scheme B||28th March||10th April||10||120||600|
Per the illustration, Scheme A is making great gains just by remitting contributions on timely basis, two days after deduction. In the same breath, Scheme B (and all its members) lose out on 120 days of potential investment returns within the year. This is one-third of the year. Accumulated over a longer period, the effect is potentially devastating.
What steps must the contributor take?
Contributors should ask questions and hold their trustees to task on ways to tackle the delays. At least there should be a discussion with employers on making early payment of contributions.
Another case which trustees need to watch is how long remitted contributions or paid maturities remain in the scheme’s account before they are invested. If they stay too long in the collections account, it does not yield much. The maximum the fund can expect is to earn an overnight deposit rate.
One principle that optimizes returns on contributions, is to remit to the trustees immediately the contributions are ready. Pension trustees and fund managers must also invest the funds promptly.
- Not making Pension contribution from other incomes
We all get income from other sources in the active working life. These incomes all provide for our needs. Thus, you get used to that income as your regular source. In planning for retirement, you need to find a way to let all sources of income provide for your future. Pensionable salaries are usually lower than what we take home and therefore what you are used to. Hence it is imperative to increase the channels of your retirement incomes through additional contributions from the ‘aside’ business(es). You may just slice a small percentage into a personal pension scheme to make up for the lower pensionable contributions.
3.0 Not taking advantage of tax exemptions in pension contribution
Pension contributions are usually exempted from taxes. The 1st, 2nd and 3rd tier contributions are exempted from income tax from the individual’s perspective. Other tax exemptions also apply at the fund management level. The income tax waivers are taxes that should have been applied to your income, but are waived, and inadvertently end up as part of your pension contribution. The ‘saved’ tax component may be a small amount compared to your salary but accumulated over the length of your career, can earn you significant benefits.
The 3rd tier scheme has a maximum of 16.5% of your pensionable salary. The loss comes in when you have the opportunity and the capacity to contribute the entire 16.5% but you do less. Assuming you are contributing only 5% of your pensionable salary when you can do 10% or the entire 16.5%. It is even more beneficial to take advantage if your company is contributing a part of the 3rd tier for you voluntarily. Some workers commit the grievous error of walking away from their company’s contribution because they (the employees) would have to contribute a portion from their own sources as a condition. Please seek further clarification and reverse your decision because you are losing out gravely.
The ideal position to assume here is to utilise the full tax waivers associated with your pension contributions. However, short-term financial demands may not allow you to place all that portion into a pension contribution.
We have already mentioned, non-payment or delays in payment of your contribution by your employer.
4.0 Early retirement which kicks in early reduction factor
The 1st tier SSNIT pension scheme determines pension benefits out of earned pension rights, an average of your best three years earnings, and a reduction factor. The reduction factor is based on the age of your retirement. If you retire at the stipulated age of 60, you will receive your full entitlement of pension. However, if you retire early, before the statutory retirement age (unless you are in the hazardous occupation), you will receive a fraction of your full entitlement. For example, it you retire at 56 years instead of 60, you will receive 67.5 percent of your full monthly pension.
The catch here is if you have not encountered any situation that should force you to retire, just stay in there and retire for your full benefit. Retiring too soon can steal your pension benefits, even for those who have attained the maximum pension rights.
5.0 Excluding spousal retirement planning
Spouses share both income and revenue together (at least supposed to share). If you plan alone and your spouse does not have any credible plan, it will halve the benefits available to you.
Spouses usually have different earnings paths and therefore different retirement planning strategies. It is important that couples know what each other is doing, as one’s financial needs may fall on another when both are in retirement. It may not necessarily be the case in the couple’s younger years, but in the older ages, that mutual support is key.
Spousal retirement planning needs serious consideration, especially in situations where one spouse is in the informal sector and may not have a regular income and therefore a formalized retirement plan. There are several options available in the market to do so.
A lack of a credible retirement plan for one spouse would obviously ‘steal’ from your fund.
6.0 Lump-sum Conversion to Regular income
This is specific to those who have retired and have received their lump sum. The lump sum is expected to provide you with income in retirement. One way to get guaranteed income is to buy an annuity with your lump sum. The annuity breaks down the lump sum into regular monthly and quarterly payments. Insurance companies are regulated to sell annuity products. Basically, pay your lump sum (or part of it) as a one-time premium to an insurance company that will pay you pre-specified regular payments for life.
Converting lump sums to regular (annuitized) payments comes at a cost. The amount in regular payments received is based on a rate applied to the lump sum premium. The rate applied depends on several factors. Therefore, two people could pay GH₵ 100,000 as a lump sum premium and yet receive different amounts of regular payments. If for any reason, you receive lower annuitized payments compared to the other person, your rate is lower and therefore your cost is higher. If your cost of converting lump sum to an annuity is high, you will receive lower regular payments. This is where buying an annuity can be a thief to your retirement income.
As annuity products have been introduced in Ghana, it is important that we have an idea of what it takes to patronize the product. Buying an annuity can be a tricky deal, so seek advice before you go into it. This is one way you can reduce the cost of your annuity. Once you understand ‘rate-determining or conversion’ factors, you can negotiate to optimize your rate and therefore your cost.
If you can arrest these thieves, you will do well to optimize your retirement benefits. You need to understand that optimizing pension benefits is dire. This is crucial because of the impact inflation has on pension benefits.
Apart from an annuity, people have over the years used their lump sum for different purposes with the hope of earning income. However, some of these ventures end up in the drain. Retirees should be wary of where they place the lump sum as that can heavily steal from their retirement income.
Yaw is a Lead Consultant for M-DoZ Consulting. He is a Pensions Expert and a trainer of Pension Trustees. He additionally runs Retirement Planning and Advisory Services.
Visit www.ghanatalksbusiness.com and listen to his podcasts and read more of his articles. Contact: 0248590955 for more engagements.