By Paul-Gordon /Guidao-ǂOab
For many of us, the only interaction we have with retirement planning is seeing the “Pension Deduction” line on our monthly payslips. Unfortunately, most people have little to no understanding of what this deduction includes or how it affects their future.
This lack of awareness is a key reason why only about 6% (1 in 17) of the working population in South Africa, and similarly in Namibia, can retire comfortably. The remaining 94% (16 in 17) must rely on alternative income sources or, even worse, on their children, for 20 to 30/40 years of retirement. This creates a vicious generational cycle: children supporting their retired parents are often unable to save adequately for their own retirement, which forces them to rely on their children later, and the cycle repeats.
Let’s unpack what’s actually included in the “Pension Deduction” on your Payslip and how understanding it can help you break this cycle.
What’s in the “Pension Deduction”?
Here’s a typical breakdown based on a pensionable salary of N$10 000. This is for illustration purposes only:
| Details | Percentage | Amount | Notes |
| Employer Pension Contribution | 7.5% | N$750 | 1 |
| Employee Pension Contribution | 7.5% | N$750 | 2 |
| Total Pension Contribution | 15.0% | N$1 500 | |
| Less: Total Cost | (1.0%) | (N$100) | |
| Risk Premiums | 0.5% | N$50 | 3 |
| Administration Fees | 0.3% | N$30 | 4 |
| Consulting Fees | 0.2% | N$20 | 5 |
| Net Pension Contribution | 14.0% | N$1 400 | 6 |
Explanation of Each Item
Employer Pension Contributions
This is the portion your employer contributes, usually as specified in your employment contract. It is typically not taxed and forms a key part of your retirement savings.
Employee Pension Contributions
This is your contribution, also outlined in your contract. You may deduct up to N$150 000 per year for tax purposes.
Risk Premiums
These cover benefits such as life cover (e.g., 3× your annual pensionable salary), disability income (e.g., 75% of salary), and funeral benefits. These benefits are important in your overall financial plan. For instance, if your pension fund provides adequate disability cover, you may be able to reduce your individual policy, saving you money. Speak to your financial adviser to assess your needs.
Administration Costs
These covers the cost of managing your pension, collecting contributions, investing them, and allocating investment returns. Many administrators also offer online platforms where you can view your investment balance, returns, and fees.
Consulting Fees
These go to the consultant who helps your employer structure the pension fund, investment strategy, and risk benefits. Consultants also provide important feedback to both your employer and to you as a member.
Net Pension Contribution
This is what ultimately goes into your retirement savings after deducting the above costs. This figure directly impacts your salary replacement ratio, which is a crucial measure of your retirement readiness.
Why the Net Pension Contribution Matters
Net pension contribution is one of the most important lines in the above table when it comes to planning your retirement as it directly impacts your salary replacement ratio. The lower the net pension contribution, the lower the salary replacement ratio, the more you will depend on your children. What is the salary replacement ratio? It is the measurement of your first pension (in retirement) as a percentage of your last salary (as an employee). For example, if you retire with a last salary of N$10 000 and a replacement ratio of 40%, your pension income will be N$4 000 per month.
A healthy retirement plan targets a salary replacement ratio of at least 75%. To achieve this, you must ensure your net pension contributions is adequate. Should your employer’s pension fund not be sufficient, you need to consider alternative means (retirement annuity, additional voluntary contributions, etc) of contributing towards your retirement to cover the gap. And that, is how you will break the unfortunate cycle of depending on your children during retirement.
Understanding what’s in your pension deduction is the first step to taking control of your financial future. The decisions you make today will determine whether you enjoy a comfortable retirement or unintentionally pass the burden on to your children and their children.
Break the cycle. Plan wisely. And speak to your financial adviser to optimise your retirement strategy.
Paul-Gordon /Guidao-ǂOab is the Chief Operating Officer, Corporate Segment, Old Mutual Namibia