Avoid becoming the penniless pensioner

At 50 years, retirement was fast approaching for Hannington Nkayivu and he really dreaded the thought.
“I went to bed and never slept. I kept reflecting on what it meant for my life and it reminded me that retirement which I had dreaded for long was just next door,” he tells me when we first met to discuss pension.

Right away, he planned through the five years within which his retirement was due with the objective of laying a financial strategy.
Unlike him, Joe Semungoma barely had the luxury of time as his retirement came early into his formal working years following a job loss.
“The changes happened abruptly and I did not expect it,” he says: “Every day, I would ask myself, what am I going to do?”

Apart from the two men, there are many more people who get soaked into anxiety at the mere thought of retirement.
According to Michael Jjingo, the chief manager business growth at Centenary Bank: “The realities of employment offer a comfort zone that may be construed to last for eternity, especially for jobs that have relative security.”

Therefore, after years of working and remitting 15 per cent of your earnings to NSSF, at least 70 per cent of workers in the formal sector, expect to receive their benefits immediately after retiring.

NSSF pays out approximately Shs23b every month to 1,500 beneficiaries, majority of whom on average have Shs14m in savings, according to the head of marketing and communications, Barbra Arimi.

By the nature of NSSF – being a provident fund – beneficiaries are paid a lump sum within 10 days after the claim has been lodged.

However, after the money has been disbursed, NSSF has no role in how a beneficiary manages it.
Many people choose to invest their money into an enterprises that can create a stream of income to push the beneficiary through retirement.

However, research conducted by NSSF has found that many beneficiaries fail to turn this money into income generating activities to support them through retirement.

This is bad news in every sense of it and some analysts point to the culture of consumerism that patronise many Ugandans.

According to Nicholas Lutakome, the head of group risk at Sanlam Life Insurance, many people will have entrepreneurship as the best bet once they access substantial sums of money.

“The bigger problem is the economic setup. The cost of running a business here is very high,” he says, highlighting problem that are associated with entrepreneurship.

But beyond this is the lack of experience as many people, who spend long in employment, have no idea of how to run a business.

“The learning curve for what it takes to run a business is quite steep,” William Nyakatura, the corporate advisor at African Alliance, says, adding: “What is sad is that you are doing the learning using your pension money, which oddly should not be happening.”

On the other hand, the structure of Uganda’s pension scheme appears to be the problem.

“Giving you the full package in one go is risky. Perhaps it should change to monthly payments,” Nyakatura says.
According to Lutakome, the country’s success can only be defined if people who have retired “have a sustainable income.”

Monetising your pension
Part of the answer lies in financial education where retiring people must be trained to measure risks and leverage on opportunities where they hope to succeed.

“You can put it in a fund. In that case you can get paid more on a monthly basis for the rest of your life,” Nyakatura says.

Beyond funds, according to Jjingo, real estate can be lucrative given the high rate of Uganda’s housing deficit.
Sammy Matsiko, a company driver will retire this year at 60 years. At 55 years he received Shs20m of his savings with NSSF, which he used to construct rentals that currently give him Shs80,000 per month.

“The returns are there but do not be blinded that you will get them fast enough,” he says.
The challenges for people such as Matsiko, according to Nyakatura is failure to accurately measure risk even when they choose to invest in real estate.

According to Annette Mulira, an investment expert, after retirement, the time horizon reduces rapidly, which implies that the risk profile is now very sensitive.

Therefore, in such a state, she says, you must invest in low risk assets with the main objective of preserving capital and cash flow availability.

“Avoid investing in high risk instruments such as stocks, business ventures and property as you will not have enough time to recoup losses in the event that the venture you go into does not work out,” Mulira says.

Low risk investments

As you approach retirment you must start thinking of what you need to invest in. Such investment areas should include low risk profile instruments such as government securities and unit trusts.

However, according to Nyakatura, you should measure their performance against inflation and currency devaluation. Money market funds can pay out a monthly return providing you with a regular income while keeping your principle intact.

Insurance is the other option which is annuity. When you receive a lump sum from a pension fund, you can allocate a portion so that the insurance company pays you a sum for either a specified period (alive or dead) or structure it to cover you until death.
Sadly, annuities are still a thing of the future, because according to Lutakome they are considered costly.

“If enrolling for annuity is left optional, very few people enroll and so the cost of annuity is high. The few who want to enroll find it a bit hard and expensive,” he says.