Upon your retirement, would you rather receive a one-time payment (lump sum) or spread it out over time through smaller repeated installments?
According to BD Life’s survey, seven out of 10 say they will cash out, while the other three indicate that they would rather leave it with the Fund to grow on condition they are entitled to unrestricted regular instalments.
Then there was another set of respondents where the majority preferred to cash out half of their total savings and leave the other half with the Fund to grow it.
When responding to the question about “leave or not to leave” the hard-earned savings, it quickly became obvious that the respondent’s decision was motivated by either fear or growth, and in some cases, uncertainty of what the future holds – fear of the unknown.
While explaining their decisions to either leave or not to leave their savings with the Fund, many said it is informed by the situation they are experiencing at the time, including personal and family pressures that require immediate attention.
They were mindful of potential alternatives, with some appearing unsure of how things would unfold once they took on alternative ventures.
Not many appear to have a clear path forward except banking on hope for a better future.
Some believe the right choice comes from a place of inner peace and a trust in your ability to embrace the path ahead, whether that’s to stay and transform the current circumstances or to leave and seek a better future, no matter the stage you are at in your life.
Research indicates that over 98 percent of NSSF beneficiaries spend their benefits within two years, often using funds for immediate needs, something the Fund’s leadership wants to try to address by urging savers to not take a lump sum but rather leave it to continue growing as they get routine instalments to fix their immediate needs.
When contacted last week, the managing director of National Social Security Fund (NSSF), Mr Patrick Michael Ayota, told BD Life: ‘At retirement, the key attribute anybody should want for the money is safety.
‘At that age, one does not have the runway of a longer life. So it is not prudent to experiment with newer, riskier ventures. NSSF offers both safety and reasonable returns. So it becomes a good vehicle to manage retirement and legacy desires,’ Mr Ayota said.
Regulator’s view
In an interview with the manager corporate and public affairs at Uganda Retirement Benefits Regulatory (URBRA), Ms Lydia Mirembe, the prudent move is to leave your savings to grow while settling for routine smaller payout.
She adds: ‘Rather than receive a lump sum payout, the accumulated benefits can stay in the scheme and the retiree purchases a sustainable payout option such as annuities and income drawdowns.
‘These products can preserve the retiree’s benefits or capital while they withdraw the monthly income. Cashing out the lump sum and pushing it into a business can’t be ruled out entirely, but it is quite risky for retirees to start and operate active businesses in their old age,’ Ms Mirembe says.
Although Ms Mirembe believes there is need for some serious research about post-retirement business ventures, some industry players and analysts think that one should have a choice to try other viable options.
One such industry expert is the country manager of Xeno in Uganda, Mr John Muhumuza Kamara.
He says: ‘A saver would best be helped with a new portfolio that allows him/her to optimise his circumstances of how much income they need to live on, what their current assets and obligations are.’
Experts have their say
An expert in retirement benefits, financial and investment sector, Mr Mubbale Mugalya, currently the chairman of the fund managers association in Uganda, tells BD Life that the decision to cash out depends on the status of your health and whether you have a roof over your head or not.
First, he argues that, someone retiring should figure out how he or she would want to spend his or her money once that time comes.
As to whether one should cash out or not, he says it will depend on several factors including the status of their health and whether or not the retiree has a shelter to retire to.
‘For an average person with Shs20 million at retirement, it is likely that that person will cash out instead of relying on Shs2 million to Shs3 million once a year as interest. This kind of return may be unattractive to some who may opt for a small business which they manage themselves.’
He adds that the daily pressures of life determine how one goes about their savings. To other people, it makes sense to go to the village and do farming because they are guaranteed food and shelter.
‘Leaving your money with the Fund or other investment vehicles works best for people with huge savings who most probably by their retirement time already have a roof over their head and can deal with day-to-day pressure fairly easily.
Why struggle?
As for Ms Susan Khainza, a Chartered Financial Analyst (CFA), and a finance and investment strategist, the wise decision is for you to keep your money where the return is competitive and in this case, she is tempted to stick with NSSF.
She says: ‘I support NSSF’s recommendation that at retirement rather than withdrawing our savings to invest on our own, we can leave our money growing with NSSF, withdraw periodically to fund our expenses, and if possible, live off our interest.
‘As we work, we save with, and our employer contributes a percentage to the NSSF Fund. NSSF invests this money for our retirement on our behalf. We give up this money today, so that in future, we have money to replace the salaries that we shall no longer receive when we retire. We shall use this money to cater for our expenses.
‘One of the reasons that people wish that rather than NSSF investing on our behalf, they withdraw money from NSSF and invest on their own is the belief that they can make more money on their own than what NSSF makes. As an investor, you will need a return to compensate you for the use of your money and the risk that you may lose your money if the investment fails or if inflation reduces the real value of your investment,’ she says.
‘People do not usually think about the fact that the risk of the possible higher returns they are looking for usually comes with a higher risk of losing some, if not all of their savings. As we get older, our ability to take risks is significantly lower than when we were younger. ‘
She continues: ‘We have fewer years, and at times, no years left at all to work to recover the money if we lose it in a bad investment. A person who has retired or is about to retire does not have the ability to take the higher risks that a lot of retirees want to take.
NSSF Act
‘The NSSF Act states that the interest rate declared shall be 2½ percent or higher. This means that our savings are protected. In addition, we get a minimum 2½ percent return. This is not something that we will get outside of NSSF. The investments that savers want to make on their own, such as real estate, are already being done by NSSF on a more professional level.
‘They are offering us a diversified portfolio, so that we are not at risk, as individuals with all our retirement savings concentrated in one asset. Moreover, NSSF has matched the cash flows from the assets they have invested in, to our withdrawal needs over the lifetime of our savings with them. They have walked with us over our employment journey. From the moment we started working, they knew when we were expected to retire and planned their investment decisions accordingly,’ Ms Khainza explains.
Ms Khainza is convinced that at the time when you are no longer working and need cash to fund your expenses, you can withdraw your money at a minimal cost.
‘If I need to sell a piece of land, I need to find a buyer and incur high brokerage fees,’ Ms Khainza notes.
She argues that the return from NSSF is more than adequate to compensate savers for not spending money today, the risk of inflation, to cater for the 2.5 percent minimum guarantee and within the boundaries of the acceptable risk they are able to take because their objective is to ‘fund our retirement.’