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The Contributory Pension Scheme (CPS) introduced what is known as Voluntary Contributions. A Voluntary Contribution (VC or AVC) is an additional non-compulsory contribution made by an eligible employee (in the formal sector) different from the mandatory monthly pension contribution as required by the Pension Reform Act (PRA) 2014 under the CPS. According to the PRA 2014, the formal sector consists of employees (active and retired) in the Public service of the Federation and FCT, State and Local governments as well as the private sector.

However, for employees in the informal sector, they are covered adequately under the guidelines for micro pensions. In their own case, they are allowed to make contributions as they are capable of. The guidelines for the micro pensions allows participants to contribute daily, weekly, monthly or as may be convenient in the year. I shall discuss in detail who and who is eligible to contribute VC or AVC later in the course of this article.

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First of all, let us delve into the general workings of the VC or AVC. The VC is remitted on behalf of the employee by the employer only. It, therefore, means that to make a VC contribution, the person must be in paid employment. This is to safeguard any form of abuse and also to monitor closely the source of contributions and prevent any form of money laundering act.

Paid employment can either be normal full-time or on a short contract basis/ political appointment. In the case of the former, VC payments are credited into the employees’ existing Retirement Savings Account (RSA) alongside the mandatory monthly pension deductions. However, for the latter, VC deductions are made into the employees’ RSA account specifically opened and would usually be the only remittance into the account. As a general rule, VC cannot be more than one-third of the employee’s monthly salary and can only be made once a month.

What Has Changed?
Over the years, it was discovered that contributors have used the VC window to manage their income tax liability thereby abusing the process. Usually, VC is tax-exempt and is deducted before PAYE tax is calculated for the individual. By putting the fund in a VC, it is invested by the PFAs and usually the returns on such will usually outweigh any tax that would be deducted (if drawn within 5 years of contribution) or otherwise no tax would be charged at withdrawal. The majority of the VC Contributors were found to withdraw their VC contributions a few years down the line to take advantage of growth on the VC and tax incentive. This defeats the main purpose of allowing such contributions in the first place which was to enhance the pension contributions made on a monthly basis so that at retirement, the contributors would have an enhanced contribution base over the years and consequently a robust pension payment.

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To this end in 2017, the pension industry regulator (National Pension Commission) also known as PenCom issued a guideline on the VC for the CPS regime, thus reviewing the entire process and procedures. The reviewed guideline also tend to curb the excesses and loopholes that had been taken advantage of over the years.

 The major highlights of the improvements are stated below:

 –  Voluntary contributions can only be withdrawn after 2 years of contribution and every two years subsequently. Unlike what was obtained before the new guideline where a VC contributor can withdraw even from the second day after making the first contributions.

 – VC contributors can only withdraw a maximum of 50% of their VC contributions over the years while the other 50% is only accessible at retirement. This will help to ensure that at least half of the VC contributed over the years is available at retirement for the contributors which will help to further enhance their pensions at retirement.

 –  For eligible active employees, VCs are now to be separated from their normal pension contributions and divided into contingent (50%) and fixed (50%) in the contributors’ RSA statement.

However, for other eligible contributors apart from active employees in long-term full employment e.g. exempted participants, retirees under CPS or defunct Defined Benefit Scheme (DBS) and foreigners, their VCs will be shown as a single line in their RSA statement.

 –  Tax is payable on all VC withdrawals made before the end of 5 years of contribution. The tax is payable on the growth and not on the amount contributed. However, for those regarded as exempted participants, retirees under CPS or defunct DBS and foreigners, the tax will be paid on the whole amount withdrawn (i.e. VC and growth).

 –  The tax rate to be applied will be in line with the PITA Act Cap P8 LFN 2011 unlike the flat rate of 5% applicable before the changes. The new tax rate applicable is as shown below:

Who is eligible?
To be eligible to contribute vide VC or AVC and in line with Section 2 of the Guidelines for Voluntary Contributions, the following conditions apply:

1)   An employee in an organization with 3 or more employees, who is making mandatory contributions under the CPS.
2)   Any worker/retiree in an organization that operates a Closed Pension Fund Administration and employed prior to June 2014 as well as employees/retirees in an organization with Approved Existing Scheme (AES).
3)   Any person who retired, disengaged or whose employment was terminated and is currently receiving a pension under the CPS, but secures another employment on contract basis.
4)   Any retiree under the defunct Defined Benefit Scheme, who secures another contract employment.
5)   The categories of persons mentioned in Section 291 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended); members of the Armed Forces and the Intelligence and the Secret Services of the Federation.
6)   Any person who is appointed by the President of the Federal Republic of Nigeria, State Government and elected officers to hold office for a stipulated tenor and who is not a career civil servant.
7)   Any foreigner residing and working in the formal sector in Nigeria.
Closing remarks
The new improvements and additions thus have curbed the flagrant abuse of the VC window and are thus ensuring that the VC is really serving the purpose of enhancing pension contributions of employees at retirement because it is now certain that at least 50% of voluntary contributions will be retained and can only be withdrawn at retirement.

Also, withdrawals can only take place after two years of first contribution and every two years subsequently. Again this will reduce the incessant withdrawals witnessed before the new guideline was issued. Even when a VC contributor decides to withdraw after two years, the minimum tax rate applicable will be 7% and it could be as high as 24% depending on the amount involved.

By and large, it is a good one for the contributors because at the end of it all, they are the ones that will benefit from the arrangement the most as a matter of enhanced pay-out at retirement.

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