What is an individual retirement savings account and why is it important?

The system has been in operation for nearly 20 years, yet it still raises numerous questions. Recent innovations have prompted a renewed discussion about what the Individual Accumulative Pension System (INPS) is and why it is necessary. This issue was explored by a correspondent from Podrobno.uz.

Supplement to the Pension

Individual accumulative pension accounts for citizens are designed for the accumulation of pension contributions. They have been in existence since 2005 and are managed by "People's Bank." The aim of this innovation was to provide citizens with additional funds upon retirement.

The accumulative pension account is replenished through mandatory and voluntary contributions.

Mandatory contributions are transferred by the accountant of the organization where the citizen is employed. Currently, the contribution rate is 0.1% of the accrued salary (previously it was 2%). This percentage is deducted from the income tax amount, meaning the employee's salary remains unaffected.

Additionally, employees can make voluntary contributions to their accumulative accounts.

"This can be done directly through the 'Hazna' app or arranged to be deducted from their salary. In this case, they can benefit from a tax exemption – the amount directed to the INPS is not subject to the 12% income tax. So, if you contribute one million sums, you save 120,000 sums," noted Zulfia Muminhodjaeva, the chief specialist of the support department for the accumulative pension system at "People's Bank."

Funds from the accumulative account can only be withdrawn after retirement. However, the law provides for exceptional cases where funds can be accessed earlier. For instance, they may be paid out to a citizen moving abroad for permanent residency. This situation also occurs if the account holder passes away: the accumulated funds are transferred to the heirs.

And what about inflation?

One of the pressing concerns among citizens is inflation. People note that it is unlikely that a substantial amount will accumulate in the account before retirement. Furthermore, inflation can adversely affect the value of the funds held in the accumulative account over time.

"This issue is addressed by the mechanism for calculating interest on pension savings. 'People's Bank' sets an annual interest rate on INPS funds that exceeds the inflation rate," said a specialist from "People's Bank."

She highlighted that in 2022, pension savings earned 12.5% interest against an inflation rate of 12.3%, while in 2023, the interest was 10% with an inflation rate of 8.77%. Thus, according to her, this allows citizens not only to preserve the value of their savings but also to earn additional income.

You can check the amount accumulated in your individual pension account through your personal cabinet on the MyGov portal. To do this, select the option "Accumulated Pension and Salary."

The correspondent from Podrobno.uz consulted an accountant to calculate how much a person with an average monthly income of 5.15 million sums could accumulate by retirement. With mandatory contributions of 0.1% over 35 years of work, taking into account annual salary increases and accrued interest on savings, it turns out that by 2059, an employee could receive approximately 16.9 million sums.

The calculations showed that in the final years of employment, this person's salary would exceed 100 million sums (which are typically increased by an average of 10% each year). Against this backdrop, the question arises: how far will these savings go in the distant future?

It is also important to remember that when making contributions, the employee does not lose anything: before 2005, everyone paid the income tax in full with no savings involved. Furthermore, nothing prevents the employee from making contributions voluntarily and taking advantage of the established benefits.

Nothing Has Changed

As for the joint resolution adopted in November of this year, it has not altered the process of calculating pension contributions.

"The document merely clarifies some terms in accordance with contemporary requirements. These changes primarily relate to the adjustment of the old regulation established in 2005 and do not affect the fundamental principles of the accumulative pension system," explained Zulfia Muminhodjaeva.

It is worth noting that a similar accumulative pension system operates in many countries – Australia, Denmark, China, Singapore, Sweden, and others. However, there, it either forms the main pension or is a significant part of it. The system assumes that individuals work for their future by contributing a portion of their salary throughout their lives.