Choosing a pension payment option – points to note

Proper planning is the secret of a happy retirement, according to experts. With this in mind, the Federal Government of Nigeria in 2004 came up with the Contributory Pension Scheme (CPS) through the Pension Reform Act of that year, which replaced the old pension scheme where the employee relied entirely on the employer for monthly pension payouts after retirement, and which left many retirees stranded after long years of active service to their fatherland. The Pension Reform Act 2004 has recently undergone a revision at the National Assembly, giving birth to the Pension Reform Act 2014.

The aim of the new pension scheme is to help employees to take their destinies in their hands. In other words, it is meant to provide employees with the necessary tools for proper planning towards their retirement. In addition to the statutory monthly contribution that the employee makes into his/her retirement savings account, the law allows such an employee to also make an additional voluntary contribution. The essence is to ensure that an employee beyond the guaranteed basic comfort could enjoy extra comfort through additional contribution that makes retirement more blissful.

So, when you have planned properly for your retirement by saving for the rainy day through the Contributory Pension Scheme (CPS), and as your retirement date draws closer, the next big thing is for you to choose the right pension payment option depending on your needs. But for you to make this choice, you must first of all understand the available payment options and how each of them works.

There are two pension payment options available, namely, Programmed Withdrawal (PW) and Retiree Life Annuity.

It is pertinent to draw a line between these two payment options to enable the employee who is on the verge of retirement to know which of them suits his purpose or needs. 

The first major difference between the two available pension payment options is that whereas Programmed Withdrawal is a product of the Pension Fund Administrator (PFA), Retiree Life Annuity is a product of the insurance company.

Secondly, Programmed Withdrawal pays pension over an expected lifespan, while Retiree Life Annuity pays pension for the entire lifetime. This means that once you have signed up for Retiree Life Annuity, the insurance company is under obligation to pay you until death.

Furthermore, there is the issue of longevity risk. For the Programmed Withdrawal option, the balance in the retiree’s Retirement Savings Account (RSA) may be exhausted during the retiree’s lifetime. In the case of Retiree Life Annuity, the longevity risk is passed on to the insurance company which pays pension to the retiree for as long as such a retiree lives.

But there is also what seems like a point of convergence between the two payment options. With Programmed Withdrawal, the retiree can collect a lump sum provided his monthly pension is greater than 50 percent of his last pay. Similarly, in the case of Retiree Life Annuity, the retiree can also collect a lump sum provided his annuity is greater than 50 percent of his last pay.

If a retiree who has chosen the Programmed Withdrawal option dies within 10 years of retirement, the balance in his Retirement Savings Account automatically goes to his beneficiaries as inheritance. For a retire on the Retiree Life Annuity option, on the other hand, if he dies within 10 years of retirement, monthly annuities will continue to be paid up to 10 years to his beneficiaries. This is so because annuity is guaranteed for a minimum of 10 years.

Furthermore, a retiree who is on Programmed Withdrawal with a Pension Fund Administrator can move to another Pension Fund Administrator if he so wishes, whereas a retiree on Annuity with an insurance company can only move to another insurance company after two years. 

It is also noteworthy that if you are a retiree who has signed on for the Programmed Withdrawal payment option with a PFA, you can at any point change to Annuity with an insurance company if you so desire, but once you have chosen Annuity option with an insurance company, you can longer change to Programmed Withdrawal with a PFA. And for a retiree who started out with Annuity with an insurance company, you are stuck with Annuity for life as you cannot at any point change to Programmed Withdrawal. So, before you choose your pension payment option, think about it properly and ensure you are making the right decision.

Further differences include that while in the case of Programmed Withdrawal the fund is in the retiree’s Retirement Saving Account which is domiciled with his chosen PFA, for the Annuity option the fund is in the Annuity pool with the insurance company.

Also, while return on investment belongs to the retiree in his RSA in the case of Programmed Withdrawal, return on investment belongs to the insurance pool in the case of Annuity.

Pension Fund Administrators forward daily and monthly return to the National Pension Commission (PenCom) in the case of Programmed Withdrawal, but, on the other hand, when it comes to Annuity, insurance companies are to forward monthly and quarterly return to the National Insurance Commission (NAICOM).

If you are a retiree who desires to always know the balance in your pension account, then you need to take note of this. For retirees who have chosen the Programmed Withdrawal option, the Pension Fund Administrators, as a rule, send periodic RSA statements to intimate you on the transactions that have occurred in your account. For those on Annuity, no statement of account is given by the insurance companies.

Finally, a Programmed Withdrawal retiree’s assets are held by the Pension Fund Custodian (PFC), whereas the Annuity retiree’s assets are held by the insurance company.