Pension Insight: Harnessing power of voluntary contributions to achieve stable retirement income

Saving for retirement has become increasingly crucial as people lead more active lives during their retirement years. In Nigeria, the contributory pension scheme (CPS) has played a vital role in enabling individuals to plan effectively for retirement.

The pension reform in the country aims to establish a sustainable system that ensures a stable, predictable, and adequate source of retirement income for every Nigerian employee.

To achieve this goal, PenCom introduced the concept of voluntary contributions (VC), providing workers with the opportunity to increase their retirement income. VC allows employees to make additional contributions beyond the mandatory contributions set by law (10 percent from employers and 8 percent from employees).

Highlighted below are some of the benefits of voluntary contributions:

Enhanced accumulation of pension savings
voluntary contributions enable individuals to rapidly build up their pension savings during their working years, helping them meet their retirement income goals.

Employees can determine the level of contributions required to reach their target income at retirement. Those with specific income targets can seek advice from their Pension Fund Administrators (PFAs) or utilize the “pension calculator” available on most PFAs’ websites.

Flexibility in making
voluntary contributions offer contributors the flexibility to decide the amount and frequency of their contributions.

Contributions may be made monthly, quarterly, bi-annually, or annually. Contributors can start and stop their contributions at their convenience, and increase or reduce the amount as needed.

Tax Incentives

Voluntary contributions can lower workers’ overall tax liability since they are deducted from salaries before pay-as-you-earn (PAYE) tax. This is unlike regular savings, which are taxed afterward.

Additionally, if individuals withdraw their VC after five years, no tax will be applied to the amount withdrawn.

Inclusivity

Voluntary contributions are available to workers, including retirees under the defunct defined benefit scheme (DBS) and those under the CPS who rejoin service on contract. Additionally, workers in the private sector belonging to closed schemes or aoproved existing schemes can also make voluntary contributions.

How to Make Voluntary Contributions

Eligible individuals should notify their employers in writing about their intention to make voluntary contributions, specifying the desired amount to be deducted. However, the amount cannot exceed 1/3 of the employee’s monthly salary, in accordance with the Labour Act of 1990.

Employers are responsible for remitting the voluntary contributions to the employee’s retirement savings account (RSA). Failure to remit the contributions after deductions will result in penalties, as outlined in Section 11 (7) of the Pension Reform Act (PRA) 2014. It’s important to note that tax will be deducted from the accrued interest or principal and interest upon withdrawal if the contributions are less than 5 years old.

All voluntary contributions are managed by PFAs and held in custody by pension fund custodians (PFC). The PFAs invest and manage the voluntary contributions in strict compliance with the regulations issued by PenCom governing pension funds and assets.

Furthermore, in compliance with the Money Laundering Act (MLA) 2011 and requirements from the Nigerian Drug Law Enforcement Agency (NDLEA), any single voluntary contribution lodgement of N5 million and above must be reported by the PFC.

Individuals interested in making voluntary contributions should visit the PFAs in person or their websites to obtain the requirements to initiate voluntary contributions.

By harnessing the power of voluntary contributions, Nigerian employees can secure a stable income at retirement.

Based on information by the National Pension Commission (PenCom)