PENSION PAY-OUT OPTIONS FOR DEFINED CONTRIBUTORY SCHEME IN NIGERIA: PROGRAMMED WITHDRAWAL OR LIFE ANNUITY?

In this study, we evaluate the concept and elements of contributory pension scheme in Nigeria, both at the accumulation phase and the pay-out phase under the new Pension Reform Act 2014 and the repealed Pension Reform Act 2004. This study further examines the two basic forms of retirement pay-out options available to employees at retirement, that is, programmed withdrawal and life annuity. Two case studies of a medical service employee and a teaching service employee working for Lagos State Government were used as illustrative examples. The concept of income replacement ratio is then used under certain calculation assumptions to compare both cases. In our analysis, we consider withdrawal of 25% and 50% from the balance of the retiree’s Retirement Savings Account (RSA) as a lump sum payment at retirement. Despite the fact that programmed withdrawal is the most sought-after and common pay-out preference of employees at retirement in Nigeria, our analysis concluded that based on the comparison of the income replacement ratio, the life annuity is a better pay-out option than the programmed withdrawal. Our final result shows that the replacement ratio is highest for a teaching service employee who received a 25% lump sum withdrawal under the Pension Reform Act 2014. However, even the best case analysed in this study still did not meet the two-thirds income replacement ratio recommended by many researchers. The result of this study provides a better understanding for Nigerian retiree to choose between a programmed withdrawal and life annuity payment.