Saving for your retirement as self-employed person

The lack of retirement plans is one of the major challenges people in the informal sector face on the days they are no longer active to work. DARE OLAWIN highlights why self-employed persons should plan for their post-work life

The energy to work keeps draining gradually as one ages in life and retirement is inevitable for all, no matter the nature of the job. Civil and public servants, employees in the private sector, and people in the informal sector like traders and artisans will all attain retirement one day.

In the Nigerian civil service, a worker retires at age 60 or after the completion of 35 years in service, whichever comes first. There is a similar arrangement in the organised private sector. At retirement, workers are entitled to gratuities or some forms of retirement benefits, while some receive monthly pensions. However, self-employed individuals in the informal sector of the economy hardly plan for a period when they will no longer be active.

In most cases, this category of people, who include owners of small and medium enterprises, drivers, okada riders, farmers, traders, and others, may face tough financial challenges in the future, especially at that time when they cannot work again. As a result, individuals must start thinking about their retirement plans.

In 2022, a survey conducted by the Small and Medium Enterprises Development Agency in collaboration with the National Bureau of Statistics indicated that Nigeria was home to an estimated 39.65 million micro, small, and medium enterprises, responsible for employing 87.9 per cent of the nation’s labour force.

Furthermore, a 2021 report from the World Bank Group, titled ‘Long Shadow of Informality: Challenges and Policies’, stated that 80.4 per cent of employment in Nigeria was concentrated within the informal sector.

As a self-employed individual, managing your finances and planning for retirement may be challenging. Without a traditional employer-sponsored pension plan, it is important to take control of your retirement savings.

Retirement may seem distant, but it is crucial to start planning early. With increasing life expectancy and the lack of any pension system, self-employed individuals must prioritise retirement savings to maintain their standard of living and enjoy their golden years. While there is no retirement age for a self-employed person, the body will surely retire itself one day, no matter the agility of the present time.

The question many would ask is, “What can I do to protect my old age?” There are many steps to a better future and individuals can plan the future according to what suits their purposes and their current income.

Before discussing the steps to take, individual workers should always think about accommodation.

Having a roof over your head as a retiree is a blessing everybody should pray for. Try not to remain a tenant at old age. Get land in an area where it is still cheaper and start developing it during this time when you are still making enough money.

You may not be able to afford lands in the cities, go to communities where you can settle and enjoy your old age. You can even go to your village if you have one. Just avoid being threatened by a landlord at a time when you should be resting.

Another important thing to note is to invest in your children. Your children are your future. Don’t spend all you have on frivolities. Reduce your visits to beer parlours, nightclubs, brothels, parties and others. Invest the money in sending your children to school. Let them be educated so they can be useful for you tomorrow.

In planning for your retirement, take the following steps:

Set clear goals

Think about the kind of life you want to live when you retire. Do you want to travel, build a house, or pursue a hobby? Knowing what you want will help you plan. You may even want to divest your business into something more profitable.

Assess your finances

Make a list of how much money you have coming in and going out. This will help you understand how much you can afford to save for retirement. As a self-employed individual, your income may not be steady like that of a salary earner. So, what you save for retirement may not be the same all the time.

However, the way to go about it is to set a target of how much you want to save from all your income. Set a percentage of what you want to save for your retirement and strive to achieve it whenever you have an income.

Choose a retirement plan

In Nigeria, there are different pension fund administrators with different pension options, like contribution pension schemes, personal pension plans and other National Pension Commission-approved schemes.

According to Oak Pensions, some of the pension plans for an individual include:

Voluntary contributions

 Individuals in Nigeria can make voluntary contributions to their pension accounts, over and above the mandatory contributions. This provides an opportunity to boost retirement savings. This means that, even if you are an employee, you can decide to pay more money into your pension account than what goes in there every month. This helps to boost what is in the account at the end of it all.

Personal Retirement Savings Account

Individuals can open a Personal Retirement Savings Account with a Pension Fund Administrator, even if they are not part of an employer-sponsored pension scheme. This allows self-employed individuals to save for retirement.

A PRSA is an account you can use to save for your retirement. It is an investment account because you can invest your savings in various investment funds through your account. You can make regular payments or lump sum payments to your PRSA. This means you can structure what you pay daily, weekly, monthly or so.

You can also pay a large amount of money into your account. Please note that this is not an amount you can decide to withdraw at will. Approach a PFA to guide you and ask for the terms and conditions. Be well informed on when and how to withdraw your money.

Some PFAs require you to attain the age of 50 before you can withdraw from your pension. Please ask questions and make use of a PFA that favours you.

Annuities

Some insurance companies in Nigeria offer annuity products, which provide regular payments to the policyholder during retirement. Annuities can be purchased with a lump sum or through periodic contributions.

An annuity is an income purchased from an approved life insurance company, which provides monthly or quarterly income to the retiree during his/her lifetime.

The monthly income can start immediately or it can be delayed till a particular period.

Real estate investments

While not a traditional retirement plan, many Nigerians choose to invest in real estate as a means of generating retirement income.

Rental property and real estate investment trusts can provide a source of income in retirement. It has been said that land doesn’t depreciate, it rather appreciates. So, individuals can invest in acres of land, which they can keep to resell later. If you have the financial power, build houses and start collecting rent to sustain yourself in old age.

Stock market investments

Investing in stocks is another way individuals can save for retirement. This option involves purchasing shares of publicly traded companies and potentially benefiting from capital appreciation and dividends. You may need an expert to educate you about this.

Mutual funds and collective investment schemes

 Mutual funds and collective investment schemes provide opportunities for individuals to pool their money with others and invest in a diversified portfolio of assets, including stocks and bonds, which can grow over time and provide retirement income.

Other steps to prepare for your retirement are as follows:

Contribute consistently

Set aside a portion of your income regularly, just like you would for your children’s school fees or rent.

Invest wisely

Put your money in other assets that can give you returns on investment. Be wise, and avoid Ponzi schemes and others that could get you defrauded.

Maximise tax-advantaged accounts

Utilise tax-friendly accounts like pension accounts, National Housing Fund contributions and others.

Build an emergency fund

Save three to six months’ worth of expenses in case of unexpected events like medical emergencies or business setbacks.

Consider alternative income sources

Diversify your income streams, such as renting out a property, investing in a side business, and dividend-paying stocks, among others.

Review and adjust

Regularly check your progress and adjust your plan as needed. Remember that the economy is not stable, so there may be a need for reviews and adjustments. However, always strive to achieve the best for your tomorrow.

Seek professional guidance

As said earlier, always consult a financial advisor or a registered pension operator for personalised advice. Listen to people who are knowledgeable in this field as they advise you on what to do.

Start early

According to Kotak Mahindra Bank, many people live with the notion that they still have a lot of time left to start planning for their retirement. This may not always be true. What you may not realise is that all the investments you make today (for your future), will happen concurrently while managing your present expenses. So, the later you begin planning your retirement, the more the burden of investing a higher amount for retirement. So, don’t wait, and start planning today!

On the other hand, it is never too late to start because starting somewhere is always better than not starting at all. Please do something before it is too late.

It is important to state that a lot of people simply presume that they have enough savings to survive their old age. What they may fail to understand is that prices for everything are just going to rise. Inflation will keep eroding the naira of its value day by day. A retirement plan is what can help you prepare for all the inflated costs and unplanned events ahead.

It is good to note that the National Pension Commission has introduced the Micro Pension Plan with the specific objective of broadening pension coverage to include workers in the informal sector.

Under the MPP, private sector organisations with less than three employees and self-employed individuals can participate in the Contributory Pension Scheme. This is to reduce old-age poverty in Nigeria.

Eligible participants include self-employed individuals affiliated with trade, profession, cooperative, or business associations, those with business name registrations, partnerships, or enterprises, informal sector employees with or without formal written employment contracts, and other self-employed individuals aged at least 18 years who reside in Nigeria.

It is crucial to note that the micro pension contributor becomes eligible to participate in the mandatory CPS upon securing formal sector employment with an organisation employing three or more individuals.

According to PenCom, making pension contributions under the MPP is designed to be easy, allowing contributors to contribute daily, weekly, or monthly based on their cash flows. They can also use a variety of payment channels, including cash deposits, electronic transfers, approved payment platforms, or financial services agents endorsed by the Central Bank of Nigeria. Please take advantage of this.

The Managing Director/Chief Executive Officer of Veritas Glanvills Pensions, Mr Godson Ukpevo, recently said, “Retirees from the formal sector have enjoyed the benefits of pension for a very long time, even from the colonial days. Workers in the informal sector, on the other hand, have been left in the cold except for a few who were able to save and invest in assets that gave them money in old age or have children who are economically viable and willing to assist.

“Many hitherto self-employed persons have had to endure old-age poverty after they stopped active work. Some laboured till very old age so that they can fend for themselves and their families.”

While urging those in the informal sector to embrace micro pension, Ukpevo submitted, “This scheme is for the benefit of those who do not look forward to gratuity when they retire. We all know that when we are weak in old age, we cannot continue or even get support from our children. Even when we have investments, it is of importance that our regular cash meets our daily needs in old age,” he stressed.

In summary, retirement planning is like preparing for a long journey. Start early, be consistent, and seek guidance to ensure a smooth ride and secure your future in old age.