Retirement planning is a basic part of financial planning and long-term savings. In Pakistan, where there is no official government pension system for the private sector, individuals need to plan their retirement and its financial aspects on their own.
Provident funds are a common and popular choice for many, but they are not the only option available. We will explore what provident funds are and compare them with other available retirement savings options in Pakistan. By the end of this discussion, you will be better equipped to make an informed decision regarding your financial future.
Defining Provident Fund
A provident fund is a retirement savings plan, usually managed by an employer or an organization, where employees contribute a portion of their salary, and the employer usually matches or contributes an additional amount. The accumulated funds are then invested in various investment options, with the objective of generating returns and building a retirement fund for the employee.
Comparing Provident Funds with Other Retirement Savings Options
Let’s get into a comprehensive comparison between provident funds and other common retirement savings options in Pakistan:
1. Employee Old Age Benefits Institution (EOBI):
EOBI is a social security institution in Pakistan that offers financial benefits to retired employees. Employers and employees make contributions to EOBI, and the benefits are disbursed to employees upon reaching retirement age. Here’s how EOBI compares to provident funds:
- Mandatory vs. Voluntary: EOBI is mandatory for organizations that have more than five employees. Provident funds, on the other hand, are usually voluntary and depend on the employer’s policies.
- Funding: EOBI contributions are shared equally between employers and employees. In provident funds, both parties contribute. However, employers usually offer a matching contribution, making it a more attractive option for some.
- Returns: Provident funds have greater flexibility in the investment options they can use, which usually leads to higher returns. EOBI funds are normally invested in low-risk government securities, which frequently yield lower returns.
2. Public and Private Pension Schemes:
The Government of Pakistan offers several pension schemes, like the Employees’ Old-Age Benefits (EOBI) pension, and the National Savings Pension. Additionally, there are some private financial institutions providing pension plans.
- Guaranteed Income: Some government pension schemes offer guaranteed income post-retirement, providing a sense of financial security. Provident funds’ returns are market-dependent and do not guarantee a specific income.
- Tax Benefits: Both EOBI and some private pension schemes offer tax benefits on contributions and disbursements. Provident funds deductions are usually done at source, which provides similar tax advantages, depending on the structure.
- Contribution Flexibility: Provident funds usually allow employees to make additional voluntary contributions, providing greater control over their retirement savings. Government pension schemes often have fixed contribution rates, which limits the savings potential and expected returns.
3. Individual Retirement Accounts (IRAs):
IRAs are personal savings accounts established by individuals to save for retirement. In Pakistan, these are self-funded and usually managed by asset management companies.
- Control and Flexibility: IRAs offer the highest level of control and flexibility. You can choose your investment options, making them suitable for individuals with specific financial goals and risk tolerances.
- Tax Advantages: IRAs offer tax incentives, such as deductions on contributions and tax-free withdrawals in some cases. Provident funds might have similar tax benefits, but this depends on the specific structure and the employer’s policies.
- Accessibility: IRAs are portable and can be carried over between employers or self-employed individuals. Provident funds are typically tied to your current employer.
4. Real Estate Investment:
Investing in real estate, such as property or rental units, can be another retirement savings option.
- Capital Appreciation: Real estate almost always offers capital appreciation over time, potentially leading to significant profits upon retirement.
- Liquidity: While real estate can be a lucrative investment, it lacks the liquidity that provident funds or other financial instruments offer. Selling property can take a long time.
- Risk and Management: Real estate investments require active management, which may not be suitable for everyone. Provident funds are professionally managed by financial experts.
5. Stock Market Investments:
Investing in the stock market can be a high-risk, high-reward retirement savings option.
- Growth Potential: Stocks have a significant potential for substantial growth over the long term, offering significant returns on investment.
- Volatility: The Pakistani stock market, like elsewhere in the world, is known for its volatility. This can be risky for retirement savings. Provident funds typically have a more conservative investment approach, which keeps investments safe, reducing risk.
- Professional Management: Provident funds are managed by professionals who make investment decisions based on market conditions and risk tolerance, which can provide a sense of security.
6. Fixed Deposits and Savings Accounts:
Some individuals prefer to keep their retirement savings in fixed deposits or high-yield savings accounts.
- Security: Fixed deposits and savings accounts are secure options with guaranteed returns, making them a low-risk option.
- Returns: While they offer security, the returns on fixed deposits and savings accounts are often lower than those of provident funds and other investments.
- Inflation Risk: Fixed deposits and savings accounts may not keep pace with inflation, potentially reducing your purchasing power in retirement.
As a retirement savings option, or even as a long-term savings plan, provident funds are a popular choice, but they are not the only option available. Each of the retirement savings options discussed above has its advantages and disadvantages, and the choice you make should be decided based on your retirement goals, risk tolerance, and investment preferences.
You need to assess your financial situation, consult with a financial advisor if necessary, and choose the option that is the best fit for your retirement planning goals. It is important to remember that diversifying your retirement savings across various assets and investment choices would help to reduce investment risk and provide a more secure financial future. Your retirement should be a time of financial comfort and security, and the right savings strategy can help you achieve that.
Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.