Many of us dream of finishing work for good, with more money than we know what to do with, surrounded by adoring grand kids, travelling to our bucket-list destinations and engaging in our hobbies. 

However, the reality is different. One of the greatest challenges that retirees in Africa have to deal with is cashflow. The few who plan for their retirement often find that they are asset rich, but cash poor. Such retirees own a house and in some cases a small farm from which they get some of their food. While they have these assets to their name, they have very little money in cash.

To support their lifestyle, they find that they are stuck with two unpleasant choices.  One, sell their hard earned assets one by one until they are completely depleted. Two, in a reversal of roles, they find that they now rely a lot on their adult children for ‘pocket money’ also known as ‘black tax’. This pocket money is what they use to take care of some household expenses, maintain their medical insurance and deal with all kinds of crises.   Often they are one medical emergency away from financial ruin.

The situation is even worse for those who do not plan for their retirement at all. They do not have assets or money to support their lifestyle and therefore will need to continue working till they literally drop, or become fully dependent on their adult children.

In the Rwandan context, the government operates a mandatory scheme for salaried employees through Rwanda Social Security Board (RSSB). Under the scheme, employees contribute 3 per cent of their gross salary (less any transport allowance) which is matched by another 3 per cent from their employer. Voluntary pension schemes have also been legalized since 2015. Examples of voluntary pension scheme service providers include Axis Pension, Liaison Group, RSSB (Ejo Heza scheme) and most insurance companies.  Some employers also run separate pension/benefits schemes for their employees.

However, less than 10 per cent of Rwandan adults currently save under a pension scheme. This small figure is partly attributed to low financial literacy and the fact that the majority of working Rwandans work in the informal sector with irregular incomes which are not subject to mandatory RSSB pension contributions.  The 90 per cent who do not save are at risk of old-age poverty. On a positive note, there is a steady rise in the number of those in the informal sector saving with RSSB’s Ejo Heza voluntary pension scheme. And the government offers some assistance to the poorest citizens under the Ubudehe programme.

Rwanda applies a "defined benefit pension” (also called a ‘final salary’ pension). This is a type of pension that pays you a retirement income based on your salary and the number of years you have worked. It differs from the "defined contribution pension” used by a number of countries in the region which pays you a retirement income based on the amount of money you have contributed to the pension.

Under the Rwandan system, salaried workers including foreigners who have been contributing to the RSSB pension fund are eligible to retire and access their state pension at 60 years. Also, a spouse and children of a retiree who dies while on pension are entitled to claim the benefits which the retiree was receiving from RSSB.

In order to access this pension you must be at least 60 years old, have worked for at least 15 years and cease to engage in remunerated activities. If you are 60 and have worked for less than 15 years you will be entitled to a one-off lump sum payment.

If you have worked for at least 15 years, you will be entitled to a monthly pension benefit of 30 per cent of your pre-retirement gross salary (less transport allowance).  The computation is based on the average gross salary you earned in the last five years before you retired. To illustrate, if in the last five years before your retirement, you have been earning an average gross salary of Rwf1 million you would be entitled to Rwf300,000 per month for the rest of your life.

For each extra year worked above 15 years, the monthly pension benefit is increased by 2 per cent. For example, assuming that you began working at 25 and worked continuously until you retired at 60, then you would have worked for 35 years. The first 15 years will entitle you to 30 per cent of your pre-retirement gross salary. The next 20 years will entitle you to 20*2% = 40%. Collectively you will be entitled to 70 per cent of your former gross salary. So if in the last five years before your retirement, you have been earning an average gross salary of Rwf1 million you would be entitled to Rwf700,000 per month for the rest of your life.

Pension payments from RSSB are tax exempt. Therefore, potentially, by earning 70 per cent of your gross salary as your monthly pension you would be earning about the same as your pre-retirement net salary. This should give some comfort to well-paid salaried employees who have worked continuously from a relatively young age.

It is important to note however that this pension scheme method tends to favour those whose salaries are at their highest in their last five years before retirement as this is the basis for calculating one’s pension. A dramatic fall in your salary in the last 5 years before retirement will affect the amount of money you receive as your monthly pension.

Also, for younger employees there is no guarantee that by the time they retire, the RSSB pension scheme will be as generous as it currently is. As Rwandans live longer thanks to advances in public health and bigger numbers of employees reach retirement age, the current scheme will be tested and monthly pension benefits for new retirees may be reduced to sustain it.

Moreover, even with a decent RSSB monthly pension and good medical insurance cover (they have caps), retirees may find that they have inadequate financial resources for expensive medical emergencies yet they are more at risk as they grow older.

For your dream retirement, it is likely therefore that you may need more than just the mandatory monthly pension benefit that you will receive from RSSB. Here are a few things you could do to achieve it:

1. Define what kind of lifestyle you would like to live in retirement and calculate how much monthly/annual income you will need to sustain it. You may need the services of a financial coach for this.

2. Aggressively pay down your debt as you near retirement so that you are still not servicing debt in retirement.

3. If you can afford it, in addition to your mandatory RSSB pension contribution, consider subscribing to a voluntary pension scheme to make additional retirement savings and thus increase your retirement benefits. If you are self-employed or working in the informal sector and are not captured under the RSSB mandatory pension scheme but receive a regular income, subscribe to voluntary pension schemes.

4. If your medical insurance cover has been paid by your employer, keep paying for it yourself once you retire, because if you get off the insurance, it is difficult to get back as a retiree as you are now considered high risk.

5. Make additional voluntary contributions to a voluntary pension scheme when the opportunity provides itself.  When you get additional income, say from a bonus payment or windfall, you should make additional contributions into your voluntary retirement scheme to increase your retirement pot. Every bit brings your dream retirement closer.

Your retirement is inevitable. The earlier you begin preparing for it the better.

The views expressed in this article are of the author and do not constitute legal advice.

The writer is a Partner at Trust Law Chambers where he heads the Banking and Finance and Capital Markets practice.

 rbalenzi@trustchambers.rw