The A to Z of retiring comfortably

Away from the active and productive days comes the evening of someone’s life when they cannot deliver as they previously did. During these times, for many, an assured salary is behind them yet they still want to maintain  a decent standard of living.

Ms Joan Mugenzi, a financial advisor, says it is necessary that one prepares for these evening years rather than wait to do something while in them.
“When retired, the agility is gone, and all that one desires is to rest. That is why preparing for them in the productive years is very crucial,” she says.

There are several ways to save for your retirement but the spotlight is on the provident and gratuity funds. Let us examine how these funds operate and hence make an informed decision, if possible, on which one to go with.

While a provident fund is a retirement fund created by an employer and the employer and employee contribute a certain amount to it, a gratuity scheme is like ‘akasiimo’, to mean appreciation. 

Contribution
There is no fund one can earn from without someone contributing. As such, in regards to the provident fund, Mr Paul Kimbugwe, the relationship officer at Octagon Africa says it has a defined contribution plan where the contributions rate made by each member is stipulated in an Act or a Trust Deed and Rules of a Scheme. 

“The contributions are by the employer and employee and are pre-determined so both know their obligations. Additionally, benefits are determined by the accumulated contributions,” he says.
 
However, Mr Edwin Twinamatsiko, a financial adviser at Concept MacFaj, says a gratuity fund is typically non-contributory, where employees do not make contributions. 
“The employer is the sole contributor to this fund and everything done is at their discretion. Summarily, the employee has no control over what the fund will amount to,” says.

Regulation
The running of any fund must be regulated to ensure the savings therein are managed as per certain guidelines. In that regard, Ms Jaquiline Kalembe, the communication specialist at UAP, says the provident fund is regulated by Uganda Retirement Benefits Regulatory Authority (URBRA). On the other hand, the gratuity fund is regulated by the employer. 

“A typical gratuity scheme is regulated as per the Human Resources manual of the employer (or a gratuity policy). The same goes for the payment of benefits,” she says.

Structure
As per the regulations, every fund has a certain way it is operated. For instance, in the case of the provident fund, Mr Kyambadde says the fund’s structure it has a licence from its regulator. 

“It also has an administrator to keep the records, a fund manager who does the investment, and a custodian who keeps the money and securities,” he says.
However, the gratuity fund is at the employer’s discretion hence determining how it happens, guided by the human resource code.

Payment
The gratuity and provident funds are both geared towards helping the beneficiary in times of need such as after retirement or in case of an accident hence unable to work. Regarding a provident fund, Ms Kalembe says in the event of retirement or employee termination, the employer is supposed to be paid. “Failure to do so, the employee can sue the company,” she says. 

Unfortunately, with the gratuity fund, there is no certainty of its existence hence no guarantee that one will get it since some companies may not state if there is a gratuity fund. 
“Therefore, one is not sure of what they will get. Then, gratuity may not be given to someone who has, say been in that organisation for less than five years. In cases of summary dismissal, this money may also be withheld,” Mr Twinatsiko says.

Certainty
Retirement only seems a welcome stage when you have certainty of how you will live out your evening years. For those with a provident fund, Mr Kyambadde says there is certainty it exists and thus can plan on how they will use it. 

“It also helps that the employee knows when they will get it hence settled,” Mr Kyambadde says.
However, in for a gratuity fund, the employer decides what and when to pay it. 
“The employer may decide to pay it yearly or withhold it up to your retirement. That creates uncertainty for the employee,” he says.

Inclusivity
A retirement benefits fund is what every employee needs to work towards and one with a provident fund is certain that when the need arises, they will have something in that kitty to fall back to. 
“The provident fund is inclusive in that even someone who has worked for just a few months gets something on their account,” Ms Kalembe says. 

However, looking at the gratuity fund dynamics, she says there is always a threshold below which, one cannot get a penny. 
“It is only available to employees who have completed a minimum number of years of service with the company, usually five years,” she says.

Investment
Saving without investment is as good as putting your money in a pool leaving it to the elements of inflation to whip it up. 
Thankfully, the provident fund has an investment structure and the custodian keeps the securities as evidence of the investment. 

“These savings earn compounded interest over the years,” Mr Kyambadde says. 
Unfortunately, that cannot be said for the gratuity fund because the funds therein are never invested. 

“The benefits of the scheme are the total of the employer contributions,” he says.

Supplementary (voluntary) retirement benefits schemes 
Away from the gratuity and provident funds, a person can supplement their retirement contributions and it is done to hedge against risks related to a concentration where all their retirement savings are with one entity. They are called supplementary as they are over and above a person’s retirement benefits scheme or gratuity. 
The following options are available on the market: 

Deposit administration plan 
These are run by insurance companies and allow one to make periodic contributions towards their retirement. “Since they are under insurance companies, they are run like typical insurance policies as required by the  Insurance Regulator. This also enables them to guarantee an interest rate to the participants,” Mr Kyambadde says.  
However, he says that over time, skepticism has grown around the guarantee offered under these plans as it often means that the company makes more return than the guaranteed rate. It is one aspect one needs to consider when deciding to join the plan. 

“While the guaranteed rate should apply, one must ensure the declared rate is always above the inflation rate as published by the Bank of Uganda. For instance, as of December 31, 2022, the inflation rate was 10.2 percent. Take an example of a plan with a guarantee of, say five percent and a final declared rate of say nine percent (that is a four percent premium, above the guarantee). Such a plan did not make a good return as it is below the inflation rate hence not ideal to invest in,” Mr Kyambadde says. 

Deposit Administration plans have dual regulation as certain aspects of them fall under the insurance regulator while others are under the pension regulator.
“One should always satisfy themselves that the plan is in line with the laws and regulations. That protects them against eventualities,” he says.