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“Having a happy retirement isn’t going to come by chance, it has to be a deliberate effort.”

The above quote is exactly what was going on in my mind while trying to put this piece together.

It is not a secret that majority of employees earn very little salaries. Not so many are earning big salaries. Statutory pension contribution is calculated at 18% of the Basic salary, Housing and Transport allowances. It can be more than 18% if the employer agreed to pay more but this is usually not the case.

There have been concerted efforts by employers to cut down costs especially pension costs and therefore, they have creatively shifted most of the employee’s benefits to other areas where pension contribution cost will not be affected when it is calculated.

For example, a typical salary breakdown will have all sorts of allowances apart from the statutory basic, housing and transportation allowances allowed for pension contribution purpose.

Consequently, when pension contribution is being calculated, these other allowances won’t form part of the basis for pension contribution to be remitted on behalf of the employee, even though the employee will receive these other allowances too.

This definitely lowers the amount to be paid as pension contribution because all the benefits being received are not captured in the calculation except for just Basic, Housing and Transportation allowances. It is worthy to note that there is nothing illegal or unethical with this practice. It is only a creative way to beat down pension costs.

Nonetheless, it is the employee’s full responsibility to plan ahead of retirement himself and ensure that at the end of the day he achieved his retirement goal of a better and happy retirement.

He should have a goal and set a target of the amount he wishes to have saved up for retirement.To do this, the PRA allows employees to make additional Voluntary Contributions into their Pension Fund Administrators (PFA).

An additional Voluntary Contribution (AVC) is a contribution made by the RSA holder in addition to the statutory monthly contributions.AVC aims to help bolster and enhance the RSA holder’s balance in order to have a tangible amount saved up at retirement.

To do this, all the RSA holder needs to do is to instruct his payroll officer or Finance department of his intention to make such additional contribution and the amount will be further deducted in addition to the normal monthly contributions and remitted to his PFA.

However, it should be noted that such an amount as instructed cannot be more than 1/3 of the employee’s monthly pay. Generally, pension funds are not taxable in Nigeria, however, any AVC withdrawn within 5 years of contribution will be subject to tax using the PITA tax scale.

Also, AVC cannot be withdrawn by the contributor until after 2 years and only 50% can be withdrawn, while the balance is only withdrawn at retirement.

You can read more on AVC here in our previous publication.

In conclusion, the AVC is a window that allows the RSA holder to plan for the future and set a retirement goal that is achievable within the ambit of the law.

Do you have any questions regarding pensions or retirement? Talk to us here

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