Financial planning key to comfortable retirement

No matter how active we are today, there will come a time when we will have to retire. However, our living expenses such as food, medical care, housing and electricity do not retire.

No matter how active we are today, there will come a time when we will have to retire. However, our living expenses such as food, medical care, housing and electricity do not retire.

Saving in a retirement benefits scheme now helps us to save and create the income needed in retirement to cater for these expenses.

However, majority see retirement as far too away and the reality only dawns on them a few years or even months to actual retirement. The problem is compounded more in countries with youthful working population like Rwanda.

It is a reality that parents will not be able to depend on their children for their upkeep in old age due to the breakdown in the traditional African social security system that provided security in old age.

Saving in an approved pension scheme is one sure way of keeping your savings safe from tax. Contributions to an approved pension scheme are tax exempt as per the set limits (Frw100,000 per month or 10% of salary, whichever is less).

The return earned on the investments is also tax exempt. An approved pension scheme remains the most tax efficient way of saving in Rwanda today and indeed in most parts of the world.

Experience has shown that in the long term, the composition of final benefit range from thirty to forty percent (30%-40%) as capital contributions with the balance of seventy to sixty per cent (70%-60%) resulting from investment income on contributions, tax savings and resultant compound interest.

People are now living longer due to advances in the medicine. You will therefore need more resources in retirement to cater for the expected longer life. The sustainability of reasonable standard of leaving in retirement is purely dependent on the accumulated retirement savings during working life.

Financial experts estimate that you need between 65% to 85% of your pre-retirement income to be able to live comfortably in retirement. The shortfall in percentage is due to the fact that in retirement, there are fewer expenses as a result of preferential taxation and reduced financial obligations generally.

The state sponsored retirement plan, i.e. the Rwanda Social Security Board (RSSB), will not be enough to accumulate the savings you need hence the reason Law No. 05/2015 of 30/03/2015 governing the organisations of pension schemes was enacted to guide the management of voluntary occupational pension schemes and spur their growth in Rwanda.

This law sets the legal and management framework for increasing domestic savings through occupational and individual pension schemes thus mitigating old age poverty.

There are three basic pillars of social security in modern society. The Rwanda Social Security Board provides primary financial security to members upon retirement.

Membership is compulsory for employers and employees. However, the coverage is low and confined to formal employment and the benefits paid out are often not enough to provide for retirement.

The situation is common in almost all African countries and is not confined to Rwanda alone.

Again, no matter how generous a benefit formula of a state managed scheme is, the resultant benefit cannot guarantee a reasonable standard of leaving in retirement as the main objective of such a scheme is to provide basic social security. Further, different pillars of social security complement each other.

Occupational voluntary pension schemes are set up by the employers for the benefit of their employees. Membership is restricted to employees in employment. However, it is not compulsory for employers in Rwanda to establish occupational pension schemes.

Most employers therefore have not set up pension schemes meaning that their employees have to plan for their own retirement. The reality is that employers have a responsibility to provide for their employees social security.

Employers who do not set up occupational retirement schemes are directly exposing their employees to old age poverty.

Employed people who are not in an employer sponsored pension scheme as well as self-employed people can join a personal pension scheme. Personal pension schemes are retirement savings arrangements set up by licensed financial institutions, banks or insurance companies where individuals are able to maintain retirement savings accounts to build old age retirement savings.

The benefits are payable either as lump sum or regular income for life time or given duration as agreed with the issuer at the point of joining. Individual pension schemes should not be confused with other insurance savings products like endowment policies.

Endowment policies entail both saving and risk products hence the final benefits may not directly reflect actual contribution savings. This also explains why majority have reservations about such products because not much disclosure may have been made to potential investors at the point of sale.

On the other hand, individual pension schemes are purely retirement savings product and future projections on savings can be made with reasonable assumptions.

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