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How to save for a high income in retirement

People in Kazakhstan often wail about small pensions. We will tell why the elderly residents of our country cannot afford a long vacation abroad and how to save up for a decent pension in this article.
How to save for a high income in retirement

There are many factors for high payouts in Europe. The two main ones are the wage level coupled with a large percentage of income saved for retirement needs. “We should not forget that people in developed countries are saving for old age for three or four decades. These states have a stable currency and a stable financial environment, there are tax preferences for people with long-term savings,” says Kairat Chegebayev, the Board Chairman of JSC LIC Nomad Life.

The pensioners of an affluent middle class or with an income above the average, who have been earning all their lives to get a financial cushion in old age, travel in other countries. “The pension system in Europe is multi-level, including a well-developed system of voluntary savings, these are pension plans implemented through life insurance institutions. By the way, the systems of additional industrial pension support in European countries have a longer history than the state systems. Besides, insurance culture is highly developed in these countries, thus, with the start of employment, a person immediately begins to save funds for retirement, which vary from 5 to 30% of the income received,” emphasizes the Chairman of the Board of JSC Insurance Company Centras Kommesk Life Gulzhan Dzhaksymbetova.

PAYG pension system was operating in Kazakhstan until 1998, when the pension was paid from the budget, and in 1998 it was transformed into a defined contribution pension system. This explains why the majority of pensioners today have not had time to accumulate such an amount for a comfortable life. However, there are pensioners 60+ who are interested in and have access to foreign travel. But for the older age group 70-80+, going abroad is mentally far away, financially unattainable and difficult for health reasons. Therefore, it is no more talk about travel in these cases. “We have a small category, the upper middle class, which has the opportunity to save part of the income for the long-term investment and, accordingly, prepare a passive income for themselves to allow spend on travel and other things in retirement. However, we are not talking about oligarchs but highly qualified specialists with an income higher than the average salary, as well as small and medium-sized entrepreneurs,” explains Zhanar Zhubaniyazova, the Board Chairman of LIC Halyk-Life.

According to international standards, the pension should reimburse the salary by at least 40%. “The average value of this index is 56% in OECD countries, and in countries with advanced pension systems it is at least 70%. Considering that the average income in our country is still low, the coefficient of 40% is insufficient,” says the executive of LIC Halyk-Life.

Revenue sources of Kazakhstani pensioners

There is a multilevel pension system in the Republic of Kazakhstan today:

- Basic pension paid to all citizens of the country;

- PAYG pension and payments from the UAPF;

- Payments from UAPF at the expense of voluntary pension contributions.

“There are several of them - retirement accounts, including retirement annuities, savings programs in LICs, property and personal savings, which are mostly invested in stocks and bonds. Their proportions are analyzed and selected individually in the West, for example, if a person is in good health, he is given a large share in the retirement annuity, while a sick person is offered with short-term products for greater liquidity. Or, for instance, the presence of significant assets allows a person to invest most of it in stocks, which are riskier but also give greater returns than bonds. The main point in the proportion analysis is the risk of “surviving” your assets, i. e. when funds for retirement may not be enough, and, such an analysis usually begins long before retirement,” notes the Nomad Life executive.

Gulzhan Dzhaksymbetova believes, it is good to have several sources of passive income in retirement; this can be a bank deposit, renting out real estate and endowment life insurance (ULI). “The task of endowment is to cultivate financial discipline and teach people how to save long before retirement. Experts recommend to start saving from the first salary, for example, setting aside 10% of your income. Thus, thanks to endowment life insurance, a person receives money by a certain age (for example, retirement) or a period (in 10-30 years). Another option for additional income for a working retiree is annuity payments, which can also be received by concluding a retirement annuity agreement with a life insurance company,” explains the head of JSC Life Insurance Company Centras Kommesk Life.

In case their pension savings are sufficient and upon the attainment of a certain age, the Unified Accumulative Pension Fund’s depositors have the right to transfer their savings to life insurance companies (LICs) and start receiving pensions ahead of schedule. By the way, if the sum of mandatory contributions is insufficient to receive a pension ahead of time, every person has the opportunity to regularly replenish his account on a voluntary basis. “Retirement annuity (early retirement) is a lifetime pension payment from a life insurance company. They are lifetime guaranteed. Even after the savings deposit is exhausted, the pensioner will receive pension at the age of 90 or even 100. The sufficiency amount for concluding a retirement annuity for 55-year-old men was 7.1 million tenge, and for women aged 52, 5 years - 9.5 million tenge in 2022. It is also possible to buy a deferred retirement annuity at the age of 45. A man needs to have at least 6.5 million tenge, and a woman - 8.1 million tenge for that. However, the payments will be started from the age of 55,” the interlocutor explains.

By concluding a retirement annuity agreement with LIC, a person fixes the income received in the UAPF, when concluding a retirement annuity agreement, and after the start of payments, such payments will be indexed by 5% annually. “The investment activity of the insurer, in particular under retirement annuity agreements and unlike the UAPF, is aimed at ensuring lifetime insurance payments to the client in the face of uncertainty for decades ahead of such macroeconomic indicators as inflation, GDP, stock market opportunities. Retirement annuity payments are made on a monthly basis throughout the life of the insured, and they are annually indexed by at least 5%,” the LIC Halyk-Life executive points out.

By concluding a retirement annuity agreement, a person diversifies their own financial risks and returns, since they receive three sources of payment in old age, such as basic pension, annuity payments and payments from the UAPF.

Photos are from open sources.

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