When you are young, you may not see the value in investing for retirement, especially when retirement (and getting old) is all but a distant event further away. The preference is often for disposable income now, to do with as one pleases.
So, what happens when you want to buy your dream home or just have a big purchase that you don’t have enough money for in your account. Do you borrow against your pension fund? Can you? Are pension funds necessary for younger people or it is better to allow them access to their funds to make their lives more comfortable now, with things such as purchasing their first homes, which are currently out of reach for many? Of course, there are options within most pension funds which allow an individual to use it for a pension-backed home loan. The question still remains, should one use that option or not?
The simple answer is yes, however, the real answer is, you should not. As an employee, you are provided with a remuneration package upon acceptance of employment. This package may consist of various components such as basic salary, housing allowance, car allowance (for some), medical aid benefit and pension fund contribution. For many employers in Namibia, the employee pension fund contribution is about 7%–8% of your total remuneration package. This is less than 10% of your package which is going towards your retirement. You have the remaining 90% (before tax and other deductions) to your disposal while currently employed. When you borrow against your pension fund, it eats up against your future earnings. Pension funds were not designed to fund our lifestyle while you are actively employed. They are reserved to take care of you once you can no longer work due to old age. They are our nest that should take care of us later in life. If anything, we should actually be saving more towards retirement, and not looking for ways to borrow against the future. Granted, there are times when one could be pressured but your pension fund should really be your last resort.
If you are lucky to have a housing allowance or subsidy, you should use that to purchase a home within your qualifying limits. If necessary, use part of your basic salary to supplement your housing needs. You will need your pension more when you can no longer work and no longer have a housing allowance benefit available. Borrowing against your pension fund, therefore, should be reserved for very extreme cases. What most people need is prudent financial management (yes, and higher salaries) but if you can manage N$1 000 then you can manage even larger amounts.
Where you save your pension is not always a choice you may have, as it is often based on your employer’s choice, which is assumed to be in good faith and to your benefit. Most pension funds provide yearly statements that show you how your savings are performing and one can question any irregularity. The employer often contributes the other half of your pension, so rest assured that they too would not want such money to go to waste. A citizenry with great retirement savings is also beneficial for a thriving economy as it released the burden from government and ensures continued spending to stimulate the economy.
Additionally, pension funds have to invest your contributions in different vehicles to ensure you have good returns that outperform inflation over time. That portfolio mix can be made up of listed and unlisted investments, both local and offshore, looking for the best returns on your investments. The alternative is that they keep it under a mattress and give you your exact change without any appreciation of value when you retire. Investing in different vehicles is how pension funds ensure your savings withstand the time value of money. Some investments may go bad, leading to losses or they do not return the required return based on many global factors, yet this is why a balanced mix with minimum capital exposure is essential for pension funds. Stock markets crash, local property markets crash, businesses go bad. Pension funds, especially defined-benefit funds still ensure that you are taken care of after retirement.
Again, it is mostly 8% of your salary. You should really be more concerned about how you are spending the remaining portion of your remuneration package to make your working life and retirement comfortable. We should encourage more savings into retirement planning, as well as emergency funds that keep us from temptations to borrow against our pension funds.
*Josephine Asino is a finance professional and is writing in her personal capacity.