Know more about private pension schemes

IN ZAMBIA, the pension system has three pillars: the first being the mandatory national pensions scheme (NPS) administered by the National Pension Scheme Authority (NAPSA); the second is the voluntary pillar that has the occupational (private) pensions schemes; and the third is the individual pension.
According to the Pensions Scheme Regulation Act No 28 of 1996 (as amended by Act No 27 of 2005), occupational pension schemes which we are focusing on today are established by employers and have to be registered by the Pensions and Insurance Authority (PIA).
Pension schemes provide many benefits depending on the circumstances leading to the payment of the benefit.
If one has attained normal retirement, the benefits are paid in such a way that 50 percent of the accumulated amount is paid as a tax-free lump sum (subject to specific conditions), and the remainder is used to buy an annuity that is paid in retirement.
What determines the benefit paid by a scheme?
The type of benefit paid is dependent on the design of the scheme with three major variants available: Defined Benefit (or final salary) Scheme (DB); Defined Contribution Scheme (DC) or the Hybrid (which combines the DB and DC).
The DB benefits are primarily based on the final salary (the final salary a member will draw is known, thus the scheme is defined) whereas benefits in the DC scheme are based on contributions, income together with the return earned on investments.
The amount that will be contributed by a member and employer is known and thus the name Defined Contribution. On the other hand, hybrids pay a mixed type of benefit which incorporates traits of both the DB and the DC.
Membership of schemes registered by the PIA
as January 2015
There are 236 registered schemes as at 1st January 2015 (although some are no longer active) with over 110,000 members. Out of the 236 registered pension schemes, 201 are DC.
Let me emphasise that members of private pension schemes are also members of the NPS as the latter is not optional.
Why should one join a private pension scheme?
When you are asked to start contributing to your company’s pension scheme, it is easy to be put off as it looks like you will be taking a “pay cut”.
However, saving into a pension is one of the most sensible financial steps you can take. Not only are you putting something aside to have a comfortable life in the future, you are also creating a social safety net for yourself that will protect you against social risks that you may face in future as a result of old age or otherwise.
Contribution rates differ from one scheme to another reflecting the differences in the financial condition of the sponsoring employers. Take interest to know your contribution rates!
Another reason why you should seriously consider joining a pension scheme is that if your employer pays into a pension scheme, it is worth joining in order to increase the value of your pension.
Apart from benefits on retirement, pension schemes can also provide benefits to dependants on death in service or death after retirement.
This means that your spouse and children will receive a pension upon your demise.
What happens when my employment status changes?
Pension benefits are portable when your employment status changes. The Pensions Scheme Regulation Act provides that a member can transfer his/her contributions plus interest to another scheme if the new employer has established such a scheme. In the absence of an approved pension scheme at the new workplace, a member can decide to leave the benefits in the scheme and access them at retirement. Such a member is called a deferred member.
Whether or not you should defer your pension depends on your situation but it is important to consider the following:
Your pension will have more time to grow, meaning that you should end up with a higher retirement income
If you carry on working, you will also continue to pay into the scheme, which means your fund will grow bigger by the time you retire.
Leaving your pension invested could mean it grows, but if the market falls; your pension value could be affected.
To be continued next week as we look at investment of pension funds and protection of scheme members
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