Recently, retirees under the Contributory Pension Scheme (CPS) have been agitating to access 50% of their Retirement Savings Account (RSA) balance with Pension Fund Administrators (PFAs) as a lump sum.
In light of this, we have put together four essential facts about the pension lump sum for your knowledge. You’ll know all about pension sum, what the Pension Act says about lump sum and how PFAs calculate lump sum in this article.
What is Lump Sum?
Lump Sum is a bulk amount paid to a retiree from the balance in the retiree’s Retirement Savings Account (RSA) - the amount left after the lump sum payment is what is used to pay the retiree's monthly pension.
Most retirees wish to withdraw as much lump sum as possible, but this has been a challenge for them as there have been several complaints that they are unable to withdraw up to 50% of the balance in their Retirement Savings Account (RSA) as a Lump Sum.
Most retirees wish to withdraw as much lump sum as possible, but this has been a challenge for them as there have been several complaints that they are unable to withdraw up to 50% of the balance in their Retirement Savings Account (RSA) as a Lump Sum.
What does the Pension Act say about Lump Sum?
According to Section 7 of the Pension Reform Act 2014, a retiree can withdraw a lump sum from the total amount credited to his/her retirement savings provided that the amount left after the lump sum withdrawal is enough to get a programmed withdrawal or annuity for life in line with existent guidelines issued by the National Pension Commission (PenCom).
It is, therefore, clear that PRA 2014 does not specifically state the percentage a retiree can access as Lump Sum but the Act wants to ensure that the amount left after the Lump Sum withdrawal is adequate to obtain a programmed withdrawal for an estimated lifetime or annuity for life.
How PFAs calculate Lump Sum
Pension Fund Administrators (PFAs) calculate lump sum using a uniform template provided by the National Pension Commission (PenCom). The variables used in calculating lump sum are your Salary Structure, Grade Level, Step, Gender, Date of Birth, Date of Retirement, RSA balance and annual salary.
Once all the variables are inserted, the Template will calculate the retirees’ Statutory Minimum and Maximum Lump sum and Monthly pension.
Why most retirees don’t get up to 50% lump sum
Most retirees are unable to access up to 50% lump sum because the balance that would be left in their retirement savings account after payment of the Lump Sum would not be sufficient to fund their programmed withdrawal for an expected life span. It is necessary to understand that in the calculation, the monthly pension is prioritised before Lump Sum and this is because the primary purpose of pension is to ensure that retirees get a constant payment for an expected life span.
What the template does is to ensure that a retiree gets at least half of his/her last salary as monthly pension for an estimated expected life span. This is before the template allows a retiree to access up to 50% lump sum. Hence, most retirees are unable to access up to 50% lump sum because the balance in their RSA after the lump sum won’t be able to fund their monthly pension.
Your retirement savings account (RSA), therefore, needs to be sufficient enough to last you a consistent payment for an expected life span. Moving to a Pension Fund Administrator (PFA) of your choice allows you to enjoy an unrestricted flow of pension throughout an expected life span. For more information on RSAs, contact Oak Pensions via www.oakpensions.com, info@oakpensions.com or call the Marketing Manager on 09087448661.
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