Withdrawing your pension before retirement... today

“Without prejudice to subsection (1) of this section, any employee who disengages or is disengaged from employment before the age of 50 years and is unable to secure another employment within four months of such disengagement may make withdrawal from his retirement savings account in accordance with the provisions of section 7(2) and (3) of this Act” – Pension Reform Act, 2014.

I have not had to quote the provisions of any Acts or Laws since I made the switch from being an International Tax consultant to being a Strategy and Transactions (M&A / Corporate Finance) advisor in 2016. It feels like a lifetime ago, and it was only about 13 months after the switch that I left Lagos for Stuttgart.

Amidst the thoughts of uncertainty that plagued me as I prepared to leave home in August 2017, for a country where I did not know anyone or speak the language, I also wondered “what would happen to my pension when I leave?”. I managed to convince myself to deal with the present and only worry about my Nigerian pension after I had settled down in Germany. Besides, I was in the early stages of my career, so my pension (from working at EY for 3 years) did not amount to a lot of money J.

A couple of months later (sometime in 2018), during a discussion with a friend who had himself moved to the UK, he mentioned that he had received 25% of his pension contributions and he explained how. The "how", and whether it is reasonable for a young professional to access their pension before retirement will be discussed in this piece.

When can you access your pension?

Ordinarily, only people who are retired from paid employment or who are 50 years or older, whichever is later, are entitled to their pension. In essence, the minimum age for withdrawals is 50 years, and even if you are 50 but are not retired, you must wait until you retire to be eligible for withdrawals.

Withdrawals can be made in several ways, including:

1. lump sum withdrawal, provided an amount that will be enough to purchase an annuity for life or a similar program is left behind;
2. periodic (monthly or quarterly) withdrawals based on expected life span;
3. annuity for life purchased from an insurance company with periodic withdrawals;
4. special cases (e.g., University professors, etc., are governed by different laws or agreements);

The law; however, makes exceptions to allow for other categories of people who retire before the age of 50, for reasons such as mental or physical disability, to make withdrawals from their pension just as other retirees over the age of 50.

The law makes another exception (see first paragraph of this piece), allowing anyone who has been out of employment for up to four months, irrespective of their age, to make withdrawals from their pension. Unlike the other categories, this category only allows the individual to withdraw a lump sum of not more than 25% of their total pension balance.

Who benefits from the “four months unemployment” exception?

Without question, Nigerian professionals who have left or are planning to leave the country for an extended period of time (over four months) to study or work in a different country are likely to benefit from the exception. After four months of quitting your job in Nigeria, you should be eligible to apply for the 25% withdrawal from your pension fund.

Individuals who lost or will lose their jobs due to the Corona virus situation, and who will be unable to secure another employment within four months should also be able to take advantage of this provision of the law.

Entrepreneurs who left their paid employment to set up businesses, or who are in the process of setting up their businesses and are not yet earning a salary from their new businesses should also be eligible to benefit from this provision.

How can I apply for this 25%?

The application process is relatively straight forward but depends on the Pension Fund Administrator (PFA) you are signed up with. Most PFAs simply require evidence of termination / resignation of employment, proof of identification and a few other readily available documents. Go to the website of your PFA.

The processing time typically takes around one to two months. It may take longer if the documents submitted are not enough / additional information is required. It also depends on the PFA.

Is reasonable for a young professional to access their pension now?

Determining whether it is reasonable to assess your pension now depends on your circumstances. There is no single correct answer, but you should consider the following factors in making your decision:

1. your current cash flow situation: as a professional living and earning in a different country (with steady cash flow and no real need for additional cash), you may not have a pressing need to assess your pension. If, on the other hand, you are a student, your pension may serve as a good source of cash to cushion your living expenses;
2. once in a life-time withdrawal: this 25% withdrawal can only be made once in your lifetime until you retire, so if you make the withdrawal now, you will no longer be able to make withdrawals from your pension until you retire or reach the age of 50, whichever is later;
3. plans for the future: if you plan on going back to Nigeria soon (after your education) to continue working, and you intend to start a business in the future (e.g., 7 to 15 years), you may consider waiting to access your pension later, when you start your business. Since you would have contributed a lot more money into your pension account by that time, 25% will likely give you a substantially higher amount in 15 years than it would today. This money could serve as capital for your business;
4. laws do change: the above considerations are only valid based on existing laws and guidelines. The laws could be amended at any time, either making it easier or more difficult to access the funds before retirement;
5. time value of money, control and devaluation of the naira: between when my friend and I had this discussion in 2018 and now, the Nigerian Naira has lost over 13% of its value, and is likely to be devalued further (against the USD, GBP and EUR) in the future. Furthermore, Nigeria currently has an inflation rate that is expected to remain in the double-digit region for another few years. Leaving your Nigerian pension in Naira exposes you to these two risks.

Closing remark

The National Pension Commission has improved the way people view pension in Nigeria. The transition to defined contribution schemes and the enforcement of proper segregation of duties, controls and other governance mechanisms have cleaned up an industry that was once plagued with fraud and uncertainty.

However, the system of allowing individuals to withdraw 25% of their total pension after only four months of unemployment calls into question the lack of a functional social / welfare system to take care of vulnerable / low income earners in Nigeria.

Regardless of social class, any employee who loses a job and is unable to get another will have to rely on her savings for the first five to six months (four months of unemployment and one to two months for processing) before she receives the cash from her PFA.

This emphasizes the need for you to have a contingency or emergency fund to protect yourselves and loved ones from unforeseen economic circumstances. As noted in this article, three to six months of non-discretionary expenses or two to four months’ salary are reasonable levels of contingency funds to hold in cases of emergency.