Planning for that pension pay-out; a few dos and don’ts

While the ordinary man prefers the latter given the windfall of cash credited to their bank accounts, once they leave an organisation, this is not a policy I am a big fan of, as a pension planning enthusiast. That is not the topic of the day, however.

Martin Nsubuga, the chief executive of URBRA has in the past mentioned that statistics did show that 80 percent of savers who receive their pensions as a lump sum squandered it all within three years. This would mean that pensioners are forced back into the job market or gear up for a last attempt at multiplying their savings. Often, this last stitch voyage is characterised by extreme risk without commensurate return rewards.

 I have had the opportunity of serving as an URBRA licensed pension trustee for the last five years. Within that time of service, I have learnt that planning for retirement starts the day you sign above that dotted line for your first paycheck. While most people start planning for this time of their lives as they approach retirement, there is considerable value in starting this discussion 25years earlier.

Most soon-to-be pensioners will do what most have known to work – put up some one-bedroom rentals and get tenants to make monthly rental payments to them into ‘perpetuity’. Upon their unfortunate demise, these rentals can be bequeathed to their next of kin. Sounds like a decent plan indeed. However, as a pensioner, investment decisions should be driven by three pillars – cashflow, liquidity value and safety. This is not to say that the decision to invest in rentals doesn’t not pass this three-way test but it is rather to point our decision making to the right funnel when in the decision-making laboratory.

Cashflows should be consistent and predictable to the investor and at best contractual in nature. The blue-chip in this aspect is the coupons from fixed rate bonds. Cashflows are also important for a pensioner as they provide a means by which they can counter the ever-present threat of inflation. Liquidity value is based on how quickly an investor can convert their investment into cash to meet current liabilities. 

As a pensioner, one tends to have various yet significant cash demands to cater for basics such as education and medical bills to luxuries such as holidays. The luxuries should only be considered when planned for, but the basic needs will not give one the option to fund/finance. For this reason, the liquidity value of your investment is an important factor to consider.

Lastly but certainly not least, safety. Indeed, you only live once as the saying goes, but your pension is not the capital you should be taking chances with. If an investment does not guarantee or pass the first two hurdles of your decision tree, then most probably it is not a safe investment. 

So, there you have it; a simple yet effective decision matrix to guide you or complement whatever you are already working with to know how to invest your windfall when you receive it. It goes without saying that the test can be expanded depending on one’s unique situations – I am only pointing you towards a simple test that would go a long way in steering you past the wrong investment given the goals of pension planning.

Mr Christopher Segawa Nantagya, CFA is a Financial Markets and Investment
 @cnsegawa.