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Destiny .M. George
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10 Common Mistakes Nigerians Make With Their Pension Plans
Planning for retirement is one of the most critical aspects of personal finance. In Nigeria, the contributory pension scheme introduced under the Pension Reform Act of 2014 provides a structured approach to securing financial stability after retirement. However, many Nigerians make costly mistakes that jeopardize their pension plans. This blog explores ten common mistakes Nigerians make with their pension plans and how to avoid them.
1. Lack of Awareness About the Pension System
One of the most significant mistakes Nigerians make is not understanding how the pension system works. Many employees are unaware of the contributory pension scheme, its benefits, or their rights as contributors.
Why This is a Problem:
Without adequate knowledge, individuals cannot make informed decisions about their pension plans. This ignorance often leads to poor choices in selecting a Pension Fund Administrator (PFA) or failing to track contributions.
Solution:
Educate yourself about the pension system. Visit the National Pension Commission (PenCom) website, attend pension awareness programs, and consult your HR department to understand your rights and obligations.
2. Failure to Choose the Right PFA
Selecting the wrong Pension Fund Administrator is another common mistake. Many employees delegate the decision to their employers or choose a PFA without evaluating its performance and customer service.
Why This is a Problem:
Not all PFAs deliver the same level of service or achieve similar returns on investments. Choosing a poorly managed PFA could mean lower returns on your contributions, delayed access to benefits, or inadequate customer support.
Solution:
Research PFAs before making a choice. Compare their fund performance, customer reviews, and accessibility of their services. Regularly review your chosen PFA to ensure they meet your expectations.
3. Not Monitoring Retirement Savings Accounts (RSAs)
Many Nigerians fail to monitor their Retirement Savings Accounts (RSAs). They assume contributions are being made correctly and ignore their account statements.
Why This is a Problem:
Errors in contributions or fund management can go unnoticed for years. Employers might fail to remit contributions, or a PFA might underperform, resulting in lower savings than expected.
Solution:
Request and review your RSA statement regularly. Most PFAs offer online platforms or mobile apps where you can track your account balance and contributions.
4. Low or No Voluntary Contributions
Relying solely on the mandatory 18% contribution (10% from the employer and 8% from the employee) is another mistake many Nigerians make.
Why This is a Problem:
Mandatory contributions alone may not be sufficient to cover retirement expenses, especially with rising inflation and increasing life expectancy.
Solution:
Make voluntary contributions (AVCs) to boost your retirement savings. AVCs can also be withdrawn partially before retirement under specific conditions, providing additional financial flexibility.
5. Early Withdrawals Without Planning
The Pension Reform Act allows contributors to withdraw up to 25% of their RSA balance if they are out of work for four months. While this provision is helpful, many Nigerians misuse it.
Why This is a Problem:
Early withdrawals reduce the overall savings available for retirement. Additionally, funds withdrawn may not be reinvested wisely, leading to financial instability later.
Solution:
Before making an early withdrawal, consider other funding options. Treat your RSA as a long-term investment, and only withdraw early if absolutely necessary.
6. Ignoring Inflation
Many contributors fail to account for inflation when planning their retirement. They focus solely on the nominal amount in their RSA without considering its future purchasing power.
Why This is a Problem:
Inflation erodes the value of money over time. A pension plan that seems adequate today may fall short of meeting expenses in the future.
Solution:
Discuss with your PFA about inflation-adjusted returns and ensure your funds are invested in instruments that outpace inflation, such as equities or inflation-linked bonds.
7. Delaying Contributions
Some Nigerians procrastinate on joining the pension scheme, especially those in the informal sector or self-employment. Others contribute irregularly or skip contributions altogether.
Why This is a Problem:
Delaying contributions reduces the compounding effect of investments, resulting in lower returns over time. Additionally, irregular contributions make it harder to achieve financial security during retirement.
Solution:
Start contributing as early as possible. If you’re self-employed, enroll in the Micro Pension Scheme to make flexible contributions that suit your income pattern.
8. Neglecting to Update Personal Information
Many contributors forget to update their personal details with their PFA, such as changes in marital status, contact information, or next of kin.
Why This is a Problem:
Outdated information can lead to difficulties in accessing benefits or transferring funds to beneficiaries in the event of death.
Solution:
Periodically review and update your details with your PFA. Ensure your next of kin information is accurate and complete.
9. Relying Solely on Pension Savings
Some Nigerians mistakenly believe their pension savings will be sufficient to cover all their financial needs during retirement.
Why This is a Problem:
Pension savings may not account for unexpected expenses, healthcare costs, or the desire to maintain a certain lifestyle.
Solution:
Diversify your retirement planning. Invest in other savings and investment vehicles, such as mutual funds, real estate, or a side business, to complement your pension savings.
10. Not Seeking Professional Advice
Many Nigerians make decisions about their pension plans without consulting financial advisors or experts.
Why This is a Problem:
Poorly informed decisions can result in suboptimal fund choices, insufficient savings, or tax inefficiencies.
Solution:
Engage a financial advisor to guide you in selecting a PFA, planning voluntary contributions, and optimizing your retirement strategy.
Final Thoughts
The Nigerian pension system is designed to provide financial security during retirement, but its effectiveness depends largely on how contributors engage with it. Avoiding the common mistakes highlighted in this article can significantly enhance your retirement readiness and peace of mind.
By choosing the right PFA, monitoring your RSA, making voluntary contributions, and seeking professional advice, you can maximize your pension savings and secure a comfortable future. Start today, and take control of your financial destiny!
