PENCOM Releases Guidelines on Voluntary Pension Contribution

Posted by sigpe2017

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On 25 October 2018, the National Pension Commission (PENCOM) published Guidelines on Voluntary Contribution (VC) under the Contributory Pension Scheme (Guidelines). The Guidelines provides uniform set of rules for the operation of VCs. Specifically, the Guidelines provides the procedure for making VCs and the eligibility criteria for participating in the VC Scheme. Although the Guidelines do not provide any commencement date, it states that it shall apply to all VCs, including those VCs made prior to the issuance of the Guidelines.

The Pension Reform Act (PRA) mandates employees within the public and private sector to participate in a Contributory Pension Scheme (CPS). Section 4(7) of the Pension Reform Act 2014 (PRA or the Act) allows employees contribute voluntarily to their Retirement Savings Account (RSA), in addition to mandatory contributions under the CPS. The Section also allows employees, who are otherwise exempted from participating in the CPS (e.g. members of the Armed Forces and retirees), to participate voluntarily. Such VCs are, however, subject to Guidelines that may be issued by PENCOM from time to time.

In line with the foregoing, PENCOM released a Circular in November 2017, providing rules for the administration of VCs. The Circular was, however, released subject to VC Guidelines to be issued by PENCOM.

The Guidelines issued reiterate some provisions of the Circular while providing additional clarity on other issues. Some of the provisions of the Guidelines are outlined below:

  • VCs shall be made only in Nigerian Currency (Naira)
  • VCs shall be made from the employee’s legitimate income, which shall not be more than one-third of the employee’s salary in a month;
  • The frequency of VC shall not be more than once a month;
  • In line with the Money Laundering Act 2011 and the Nigerian Drug Law Enforcement Agency (NDLEA), a Pension Fund Custodian (PFC) is required to report any single VC lodgement of N5 million and above;
  • 50% of every amount lodged as VC shall be treated as “contingent” which is available for withdrawal, the remaining 50% shall be treated as “fixed” which can only be accessed upon retirement;
  • Active and mandatory contributors shall be entitled to withdraw VCs once every two years from the date of last withdrawal;
  • Subsequent withdrawals shall be based on incremental contributions and the contributor can only withdraw a maximum of 50% of the value of incremental contributions remitted from the last withdrawal date. However, contributors are also entitled to withdraw any portion of their initial contingent of 50% available;
  • For active and mandatory contributors, the income accrued on VC shall be taxed at the point of withdrawal, where withdrawal is made before the end of five years;
  • Retirees and exempted contributors are entitled to withdraw all their VCs in the RSA at the expiration of their contract of employment. However, the principal amount and any income accrued shall be subjected to tax where the withdrawal is made in less than five years from the date of the voluntary contribution;
  • PFCs shall remit all tax deducted to the relevant tax authorities within 21 days following the end of the month of deduction and shall also render returns of such remittances to the PENCOM twice yearly.

In line with the Circular released in 2017, this Guidelines has provided certain rules which aim at curbing the use of VC Schemes for tax evasion purpose. In addition, taxpayers who have previously saved their monies using VC Schemes with the aim of withdrawing same within short term will now have to be mindful of the rules regarding withdrawal of monies from the VC Scheme.

Although the Guidelines provides uniformity and additional clarity on the administration of VCs, the issue of tax treatment of VCs still raises some concern, particularly the tax treatment of VCs of retirees and exempted contributors. A strict reading of the PRA 2014 suggests that only the income earned on VCs should be subject to tax where withdrawals are made in less than five years. However, the Guidelines provides that, in the case of retirees and foreign employees, the principal amount together with the income earned should be subject to tax, where withdrawals are made in less than five years. In addition, although there have been several contentions regarding the withdrawal of VCs and related income from an RSA before retirement, the introduction of a 50% restriction on withdrawal is nowhere contained in the PRA 2014. It is pertinent to note that the Regulatory bodies should not issue Regulations that contradict the provisions of the Principal Act.

On another note, in 2017, the Lagos State Internal Revenue Service (LIRS) issued a Circular titled Tax Relief on Voluntary Pension Contributions. The LIRS Circular states that the LIRS would hold employers liable for any unpaid taxes arising from VCs of their employees. Given that this Guidelines clearly places the burden of tax remittance on VCs on the PFC, the intention of the LIRS to hold employers liable in such cases of non-payment of tax appears contradictory.

Given the regulatory and tax developments relating to VCs, all relevant stakeholders should ensure to seek relevant professional advice relating to the treatment of VCs.


Source: Mondaq