Lumpsum payment would deplete pension savings, increase old age poverty
The move by the Senate to Amend the Pension Reform Act 2014 to enable retirees withdraw up to 75 percent of their pension savings as lump sum has continued to receive serious bash by experts and those who have watched it happen in other jurisdictions.
Experts have argued that the move will erode savings in the Retirement Savings Account, lead to old age poverty and defy the very essence and objective of the Pension Reform law.
The objectives of the Contributory Pension Scheme(CPS) established under the Act is to among others (a) ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due and (b) assist improvident individuals by ensuring that they save in order to cater for their livelihood during old Age.
The Bill being sponsored by Aliyu Wamako, an APC senator from Sokoto when enacted will provide succour to retirees in the delay and other difficulty they face in withdrawing their saving.
The danger analysts say is not in giving retirees or contributors theirlump sum, but what they do with the money afterwards.
Most of the retirees were never specialist business men or women, and when this money is given to them, they naturally go into new ventures that they were never into, and experiences have shown that such monies are usually lost. Some are swindled and when this happens, the objective of the pension scheme is defeated and those people, if care is not taken become problems to the society as they age with little or no pensions to fall back on.
The proposed Bill seeks to amend Section 7(1) of the Act as follows:
(a) To exclude persons who retire before the age of 50 years in accordance with the terms and conditions of their employment from accessing their RSA balance in line with Section 7(1) of the Pension Reform Act (PRA)2014.
(b) The Bill also seeks to amend Section 7 (1) of the PRA 2014 by inserting the words “of up to 75 percent “immediately after the words “a lump sum”.
The import of the proposed amendment, in line with the foregoing, analysts said is to allow the following persons to, rather than withdraw a lump sum based on a computation that allows the balance in the RSA to be sufficient to procure a programmed withdrawal or annuity for life, to withdraw up to 75 percent as lump sum, irrespective of whether or not the balance would be sufficient to procure a programmed fund withdrawals or annuity for life:- (i) Employee who duly retire or attain the age of 50 years, whichever is later; (ii) Employees who retire before attaining the age of 50 years either on the advice of a suitably qualified physician or a properly constituted medical board certifying that the employee is no longer mentally or physically capable of carrying out the functions of his office; (iii) Employees who retire before attaining the age of 50 years due to total or permanent disability either of mind or body.
According to an FT report; when George Osborne, then the UK Chancellor of the Exchequer, decided that from 2015, those aged over 55 could take much more of their pension in cash, there was a chorus of warnings from experts.
The move the experts said then would likely lead to inexperienced consumers being hoodwinked into paying excessive fees as they cashed in on pension rights. “It was likely to reduce their provision for retirement, as pensioners either bought inappropriate savings products or failed to invest properly at all.”
“And it was likely to replicate the same problems as earlier troubles in the annuities market, with pension companies milking profits from uninformed customers rather than producing the keenly priced products pensioners needed.”
Now a report according to FT of the Financial Conduct Authority recently showed that the pension freedom rules have failed to produce a creative response from the industry. Just as over half of over-55s have drained their pension pots, but many have put the money in risky and expensive “drawdown” products without taking advice.
It is now clear that the policy was flawed from the outset, motivated more by the desire to buy support among older voters and bring forward tax revenue than to encourage better provision for retirement, the FT report said.
Failures in the system create trouble not just for consumers but for the country.
Ivor Takor, director, Centre for Pension Right Advocacy who has spoken hard against the move to amend the law,which only became effective after an amendment on July 2014 said “We are not unmindful of the fact that the proposed amendment may be popular with some workers, because collecting a huge lump sum from ones Retirement Savings Account immediately after retirement is very attractive.”
Takor, in a position paper titled ‘Move by Senate to Amend the Pension Act 2014’, faulted the Federal government for the proposed amendment, which primarily seeks to enable retirees withdraw up to 75 percent of their pension savings.
He said it is doubtful if the 25 percent balance in a retiree’s RSA, after deduction of 75 percent lump sum, would, if spread through the retiree’s expected life span, can be adequate to reasonably cater for his livelihood during old age.
Accordingly, the proposed amendment would only result in the depletion of the RSA without regard for the retiree’s continued subsistence, thereby impoverishing retirees and opening them to old age poverty. “The proposed amendment, therefore, would necessarily defeat the above highlighted objective of the Contributory Pension Scheme.”
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