CPS: Enjoy ‘tax free benefits’ on additional voluntary contributions

Most investment vehicles that offer returns including savings, deposits and statutory pensions are usually taxed by fund managers. This lowers whatever your expectation is in terms of investment income irrespective of whatever purpose it is meant for.

But with the coming of the Contributory Pension Scheme following the Pension Reform Act 2004 as amended in 2014, employees covered in this scheme have the opportunity to enjoy tax free investment in “Additional Voluntary Contribution(AVC)”.

Additional Voluntary Contributions are extra funds you can opt to add to your mandatory pension contributions, or simply set aside as retirement savings. These funds would be deducted from your monthly emolument by your employer and remitted into your Retirement Savings Account (RSA) with your chosen PFA, along with your regular pension contributions.

AVC differs from other regular savings you may have, as it is deducted from your salary before tax. This is a significant advantage of the AVC, as it means the contributions are tax-free and lower your overall tax liability.

According to experts from ARM Pensions, AVC is an underutilized channel in the pension scheme despite its potential for enhancing savings.

This is because, apart from what the employer has provided, there is an opportunity for people to enhance their pension savings through this platform so that by the time they are due for retirement, there would be substantial amount of money to make the person retiring comfortably.

According to the experts, it also has implication in the interim, if for example it becomes possible to buy mortgage with pension savings as being assured by the National Pension Commission (PenCom), because the larger the amount you have in your RSA balance, the larger the amount you can use as a proportion of it for collateral.

For instance, someone that has a N40 million balance in his RSA account will be able to get a quality mortgage than someone who has N15 million and you could make choice on which type of mortgage you want to buy. And part of that, additional amount could have come from voluntary contribution, so it becomes an incentive to save more because I know that when I get to a certain threshold it affords me the opportunity to qualify for a particular mortgage and if I don’t I many not qualify.

So, far and above what my employer is putting down for me, I could decide to make additional contributions. It has far reaching implications, not just at the point of retirement but also in the interim.

Secondly, there is a tax advantage. Whatever you put in there is not taxed. If it stays there for five years even if you decide to take it, it’s allowed, it’s not taxed and there is also a return. If you put in N200, 000 today, by 2020 you could withdraw the N200, 000 if need be plus accrued interest. So, I think many people have realized that the tax advantage and other products that may come up in the future like the mortgage as well as investment returns that will come from a balanced portfolio, will definitely be better than returns on a savings deposit and above inflation rate.

AVC’s are pooled into RSA Fund and, therefore are invested and managed in the same rigorous manner as your regular pension contributions.

An additional advantage, and a major difference from regular pension contributions, is that you are at liberty to decide the amount you wish to contribute, in addition to the frequency of the contributions; e.g. monthly, quarterly, bi-annually or annually.

You can also withdraw from, or liquidate, your AVC at any time. Note, if a withdrawal/liquidation is made within five years after the AVC was remitted, there will be a tax charge as tax exemption only applies to contributions that remain invested for a minimum of five years.

In addition to boosting your retirement funds, AVC can also serve as a form of targeted savings towards specific projects, such as, mortgages, children’s school fees or a dream vacation.

In addition to providing an avenue to set aside more funds towards retirement, the tax incentive is another key attribute of the AVC Scheme. The AVC scheme is fully backed by the Pension Reform Act, 2014 therefore, you can be rest assured that your Additional Voluntary Contributions are safe and in the right hands.

Every employee covered under the contributory pension scheme is eligible to make Additional Voluntary Contributions. All you need to do is inform the relevant department in your organization (e.g. Human Resources or Finance) about your desire to make voluntary contributions, stating the amount and frequency.

In the event you decide to withdraw from, or liquidate your AVC, all you need to do is complete and submit benefit withdrawal form with your PFA, attaching a passport photograph and letter requesting for your funds. Your application will be processed by your PFA and benefits paid within a short period of two weeks.