“Hello! Good afternoon, sir.”
“Good afternoon, madam.”
“My name is Nkechi, I work for BusinessDay Newspaper.”
“Okay, Nkechi. How may I help?”
“Thank you, sir. Sorry for bothering you with a phone call at this time of the day. Please, I will like to take a little bit of your time for some quick questions on the Nigerian Pension System. I just read one of your online articles titled, Six Ways to Differentiate Between Life Insurance and Annuities and I thought you’re the right person for me to speak with.
“Really, that article must be about six years old.”
“You’re correct sir. You wrote it as far back as November 2011, but it is still very relevant.”
“Thanks for that, Nkechi.”
“Sir, I promise, I won’t take too much of your time in this conversation.”
“Okay, go ahead, Nkechi.”
“Thank you, sir. First, I will like to know the legislated tax incentives for employees to save via a Pension Fund Administrator (PFA). Specifically, is the investment gains within a PFA system tax free?
“Alright. The contributory pension system in the country offers robust tax incentives as contained in section 10 of the Pension Reform Act 2014. The law states that contributions by both the employee and employer are tax deductible; interest, dividends, profits, investment and other income earned on the pension fund/asset are exempted from taxation. The retirement benefits eventually paid to employees/retirees are not taxed as well. However, let me clarify that the investment income earned on an employee’s Additional Voluntary Contribution (AVC) is taxed at the point of withdrawal if this takes place within five years of making the additional contribution.”
“Thank you, sir. But still on the issue of taxation, what tax incentives exist at retirement age – can the retiree access a tax-free lump sum from the accumulated fund? If so, what percentage or amount can he get?”
“Yes, Nkechi. An employee can access a tax-free lump sum from his account on retirement provided that after taking such a lump sum, the amount left in his Retirement Savings Account (RSA) will be sufficient to provide him with programmed withdrawal or annuity as stipulated by the National Pension Commission (PenCom). He can also have access to a lump sum of up to 25% of his account balance if he retires voluntarily, disengages, or gets disengaged by his employer. However, such withdrawal can only take place after four months of being without another employment.
“Thanks for that clarification, sir. On the issue of retirement benefits, whether via programmed withdrawals from the PFA or annuity payments from an insurance company, is the programmed withdrawal or annuity payment taxable? If so, at what rate? Is there any tax-free income allowance?”
“As I just mentioned to you, Nkechi, the Pension Reform Act is so good to employees: Retirement benefits are not taxed.”
“Wow! I’m sure every worker will be happy to know this. But sir, within the programmed withdrawal option, can a retiree choose the amount of programmed withdrawal he can receive or is it fixed by the PFA? For example, if the retiree wants a lower amount to stretch the fund over more years, can he choose to do that? Or can he vary the amount mid-way through the programmed withdrawal arrangement?”
“That’s a good question, Nkechi. I will be as open as possible in answering you based on what I know currently exists in the industry. PenCom has given the PFAs strict guidelines on payment of programmed withdrawal. In practice, when an employee elects to take a programmed withdrawal, the PFA uses the PenCom approved template to calculate the amount payable on a monthly basis, after the retiree has exercised his right to a lump sum payment from his account (if he wishes). This template works on the basis that programmed withdrawal is made up to age 82 for a male retiree and up to age 84 for a female retiree. In other words, there is little room for a retiree to vary his/her programmed withdrawal. He can however do this indirectly by reducing the amount of lump sum he takes in order to allow for more fund to remain in his account – which will then increase the amount available to him for programmed withdrawal.
“Okay sir. I think that makes a lot of sense. Sorry, I’m taking so much of your time on phone but I still need your opinion on the investment of an employee’s pension contributions.”
“Go ahead, Nkechi.”
“Thanks. Sir, with the programmed withdrawal option, the retiree assumes the entire investment risk since there are no guarantees. So, in that case, does an employee have any say in the underlying investment of his fund? Can he, for instance, dictate to the PFA the stock or plots of land that should be bought with his money? Or, does the PFA have the absolute power to invest the fund as deemed fit without any recourse to the employee?
“Hmmn, that question is a bit tricky but let’s first agree that the PFA is a professional firm that is duly regulated by PenCom. So, a PFA cannot simply act as it wishes without regard for the set rules and regulations. Let me also add that the employee chooses his or her preferred PFA for the management of his fund. In doing so, we can conclude that he relies on the professionalism, expertise, and experience of his chosen PFA. Having said that, I will like to point out that an employee cannot dictate to the PFA on investment, but his interest is stringently protected by PenCom. The regulator has given the PFAs very conservative investment guidelines with a view to ensuring that the interest of each employee or retiree is not jeopardized. In addition to this, the regulator will be implementing a minimum benefit guarantee rule very soon. This will ensure that the benefits paid are not below certain levels.”
“Thank you very much for your time sir. I cannot even thank you enough. Please have a good day.”
“It’s my pleasure, Nkechi. Enjoy the rest of the day.”
“I will, sir. Thank you.”