Workers halt voluntary contributions over 50% re-allocated to retirement benefits

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Chuks Udo Okonta

Many employees have asked their employers to stop deducting voluntary pension contributions due to the recent circular issued by the National Pension Commission (PenCom) which allows contributors to access only 50 per cent whilst the balance is re-allocated to contributors’ retirement benefit and available for use at retirement date.

Inspenonline gathered that most workers in Lagos State, who had earlier embraced voluntary contributions, had stop contributing as they considered the new policy by PenCom harsh and defeats the purpose for contributing, which is to have something to fall on immediately they retire.

According to the workers, the issue of accrued pension rights, which often drags for up to three to four years do not allow them draw their pension benefits immediately they leave service, hence, the need to leverage what accrued from their voluntary contributions. They noted that the new rules by PenCom will also deprive them of funds to attend to immediate needs.

A source in PenCom told Inspenonline that the decision to re-allocate 50 per cent contributions to the contributors’ retirement benefit and available for use at retirement date, was to enhance retirees’ pension benefits.

The source urged the aggrieved workers to exercise patience as the major challenge clogging payment of benefits which is accrued rights will be sorted out by governments as the economy improves. The source added that private employees have no problem with the new rules as they never have issues of accrued rights.

PenCom had on 16 November 2017 issued a Circular to all Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs) communicating new guidelines on withdrawals from voluntary pension contributions (VC). The new guideline, which took effective December 1, 2017, mandates compliance with the procedures by all licensed PFAs/PFCs or face sanctions.

The Circular was issued pursuant to the high trend of requests for withdrawals from VCs, usually shortly after contribution. According to the pension regulator this defeats the purpose of VC which is to enhance pension at retirement. It also results in payment of insignificant amount of income tax to tax authorities.

Key highlights of the guidelines as provided PenCom include: Limits to number of withdrawals: Withdrawals from VC account is limited to once every 2 years. Subsequent withdrawals shall also be limited to the incremental contributions from the last approved withdrawal date.

Limits to amount of withdrawals and allocation of VC to retirement benefit: For mandatory contributors, 50% of the VC is available for withdrawal, subject to the limit on number of withdrawals. Taxes would be deducted on income earned in line with Section 10(4) of the Pension Reform Act, 2014.

The remaining 50 per cent is unavailable for withdrawal. It will be re-allocated to the contributor’s retirement benefit and available for use at retirement date.

Restriction on withdrawals by exempted/foreign contributors: The limit on the number of withdrawals described above also applies to exempted/foreign contributors.

However, exempted/foreign contributors can withdraw all VC amount after two years of contribution, subject to deduction of taxes on both income earned and principal amount when withdrawal is less than five years of the contribution.

It is expected that the Circular would curb the high rate of voluntary contribution withdrawals, ensure appropriate tax payments and strengthen the process of voluntary contribution administration. Employers are therefore advised to review the Circular and communicate this to their respective employees to ensure that they are properly guided on the implications of making and withdrawing voluntary pension contributions.

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