A voluntary contribution, also known as Voluntary Pension Scheme (VPS), implies that employees with Retirement Savings Accounts (RSA) have the free will to make additional annual voluntary contributions, up to certain Internal Revenue Service (IRS) approved levels. It is a personalised saving also regarded as an investment driver for providing radical support for life after retirement. These contributions are remitted into and withdrawn from a duly registered RSA and managed by a licensed Pension Fund Administrator (PFA).
An additional voluntary contribution (AVC) describes an employee’s tax-deferred payment to an RSA that exceeds the amount his or her employer matches. This system is funded by the employer and employees together.
The Pension Reform Act 2014, which was signed into law by the Nigerian President on July 1, 2014, allows employees to make Voluntary Contributions (VCs) into their RSA in addition to their mandatory pension contributions. These, with the sole aim of enhancing their retirement benefits, are referred to as voluntary contributions because they are non-obligatory contributions made by an employee in the formal sector through the employer.
How does it help?
In today’s world, it has become paramount to plan for retirement. This is as a result of the perception shift on retirement that differs from that in prior generations. The generations of today have a high expectancy of life after work, which involves financial freedom and ample with relaxation. Some of the ways they intend to enjoy retirement life is traveling the world, pursuing hobbies, starting up businesses and enjoying quality family time, among others.
There are certain fears in individuals’ minds about voluntary contributions. Some of these include the inability to pay interest, market risk (changes in the value of an investment due to changes of market factors, such as interest rates, exchange rates or stock markets volatility), interest rate risk (probability of an investment’s value change due to a change in the absolute level of interest rates), among many others. However, these risks associated with voluntary contributions do not rule out the numerous benefits.
The benefits of voluntary contributions are immense. It allows employees to save for retirement by selecting their suitable investment option. You are free to choose the amount and time to begin saving by contributing to the scheme regularly during your working life. It is imperative to also note that the investment allocation would impact the net growth (i.e. real return) of your contributions over the period and it grows tax-free. For active contributors, the Voluntary Contributions Section of the RSA statement is divided into two: (i) 50% as the contingent, available for withdrawal and (ii) 50% fixed for pension, is utilised at the date of retirement to increase pension. Therefore, voluntary contributions are available to help with medium-term financial planning.
There are guidelines on voluntary contributions under the Contributory Pension Scheme (CPS) which are important to note. For one, voluntary contributions are made only in Nigerian Currency – Naira. An eligible contributor notifies his/her employer in writing of his intention to make voluntary contributions and the amount to be deducted from his emolument (salary) and remitted as Voluntary Contributions. The contributions are made from the employee’s legitimate income, which should not be more than 1/3 of the month’s salary, in line with the Labour Act of 1990 (afterall, you must live now to be alive to live well later ).
In addition, all Voluntary Contributions made by active or mandatory contributors are retained in the RSA for a minimum of 2 years before they can be accessed; which is either accessed as Lump Sum and programmed withdrawal or used to purchase an annuity upon retirement. Subsequent withdrawals can take place once every two years and this applies to only the additional contributions made after the last withdrawal.
Finally, you should know that any income accrued on the VC(s) is taxable, where the withdrawal is made before the end of five (5) years from the date the VC(s) was made. As such, it helps mostly as a medium to long term investment tool and certainly yields significantly for the contributor who regularly adds to the pool, based on the law of compounding effect.
Voluntary contributor retirees under the CPS are eligible to withdraw all the VCs in their RSAs only at the expiration of the contract employment or may choose to consolidate part or all to increase their monthly pension. The tax treatment for them is based on both income and principal amount, when a withdrawal is less than five years from the date the VCs were credited into the RSA.
For Non-Nigerian citizens residing and working in Nigeria, they are eligible to withdraw all the Voluntary Contributions in the RSA at the expiration of the contract employment or relocation to their country, subject to the submission of all regulatory required documentation. The tax treatment is based on both income and principal amount when the withdrawal is less than five years from the date the VCs were credited into the RSA.
Employees of licensed Closed Pension Fund Administrator (CPFA) Sponsor Companies recruited before June 2014 are eligible to contribute voluntarily under the CPS. These employees are eligible to withdraw their VCs only at the expiration of their contract, provided the VCs have been retained in the RSA for two (2) years. The tax treatment for them is based on both income and principal amount when the withdrawal is less than five years from the date the VCs were credited into the RSA.
On the other hand, employees of CPFA Sponsor Companies recruited after June 2014 are required to join the CPS by opening RSAs with any PFA of their choice and the administration of their VCs shall be in line with active/mandatory contributors. Where the withdrawal is made before the end of five (5) years from the date the VC was credited into the RSA, tax is applied on income accrued only.
The post-work life everyone looks forward to requires serious planning, if you will be able to afford the desired post-retirement lifestyle. To achieve a secure and comfortable life at retirement, a voluntary pension system is one of the best investment journeys employees can embark on.
Stanbic IBTC Pension Managers Limited is a licensed PFA set up with the primary objective of delivering quality pension fund administration and management services to both private and public sector employees covered by the Pension Reform Act 2014. We currently have over 1,8m registered clients and we manage Nigeria’s largest RSA Fund with total assets under management worth over N2 trillion.
We have expertise in helping to manage and growing the pension fund of our contributors while actively supporting with advisory and effective financial planning during active work life. Call us today on 01 271 6000 if you are ready to set up voluntary contributions. We will also be happy to help should you require any other support regarding your pension. Simply email [email protected] and an advisor will be in touch.