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Financial Literacy

Guide to Nigerian Pension Fund Contribution

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Pension

This article explains what you need to know about Nigerian Pension Fund Contribution. It addresses;

  • How much to contribute
  • When to contribute
  • How much you can withdraw
  • Tax implications
  • And when you can withdraw

The current pension act ensures your pension funds remains one of the most regulated funds in Nigeria. Despite been around for over a decade not many people fully understand how it works especially as it affects their contributions. So without wasting time lets dive straight into providing answers to some of the questions you may have.

What is a Pension Contributory Scheme?

A Pension contributory scheme is a scheme designed to ensure employees derive the benefit of being paid their pension adequately and as when due upon retirement. The Pension Commission regulates the fund. It is designed in such a way as to ensure your employer has no control over how your pension is invested and paid to you.

How much do I contribute?

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Employees are expected to contribute 8% of their (Basic+Housing+Transport allowance) every month. Your employer deducts this amount from your salary every month. Your employers also contribute a minimum of 10% of your (Basic+Housing+Transport allowance) every month on your behalf.

The total contribution of at least 18% of your Basic, Housing and Transport Allowance is then transferred at the end of the month to your Retirement Savings Account, which is opened in your name by your Pension Fund Custodian. The amount is then assessed by your Pension Fund Administrators who help you invest the money.

See difference and roles of your Pension Fund Custodian and Pension Fund Administrator

Can I contribute more?

You can contribute more that the 8% stipulated. Your employer can also contribute more than the 8% or even contribute the whole 18% on your behalf. You can also contribute any lump sum amount on your own provided you have complied with the 8% contribution. Meaning you can just contribute voluntarily should you have excess cash.

Is it taxable?

Any amount payable as a retirement benefit under the Act is not taxable. However, any income earned from any voluntary contribution made (as indicated above) shall be subject to tax at the point of withdrawal where the withdrawal is made before the end of 5 years from the date the voluntary contribution was made.

PENCOM has recently issued updated guidelines addressing this issue.

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Who is exempted from Contributing?

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I. According to the act, any employee who has three years (or less) left to retire prior to the commencement of the act is exempted. This means only those who where due to retire three years before 2004 are exempted from the act as such all employees are currently not exempted.

II. The categories of person mentioned in section 291 of the Constitution of the Federal Republic of Nigeria 1999 shall be exempted from the Scheme. This refers to judicial officers such as Supreme Court Justices, Judges etc. Members of the Armed Forces are also exempted.

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What do the Pension Fund Administrators do with the money?

The Pension Fund Administrators are very well regulated by the Pension Commission and have a set of guidelines upon which they operate. As such, they are only expected to invest your money in certain authorised markets and with limits. Currently, they can invest in stocks, treasury bills, bonds, real estate and other investments as approved by the Pension Commission. See Authorised Markets and Investments.

See list of PFA’s and their addresses.

 

When can you make withdrawals from your pension fund?

No person shall be entitled to make any withdrawal from his retirement savings account before attaining the age of 50 years. However, there are exceptions. These are if an employee

(a) is retired on the advice of a suitably qualified physician or a properly constituted medical board certifying that the employee is no longer mentally or physically capable of carrying out the functions of his office;

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(b) is retired due to his total or permanent disability either of mind or body: or

(c) retires before the age of 50 years in accordance with the terms and conditions of his employment shall be entitled to make withdrawals. This includes those who have been fired from work or have recently lost their jobs. However, a period withdrawals can only be made after 6 months of loosing your job.

When I retiree or attain 50 years old how does the money get paid to me?

You can be paid in either of the following ways

(a)          You withdraw money from your retirement savings account monthly or quarterly depending on your expected life span. For example, if you have N10million in your RSA and you expected to live for another 30years they divide the N10million by 360 months or 120 quarters.

(b)         Through an annuity for life purchased from a life insurance company by the National Insurance Commission with monthly or quarterly payments

(c)          You can also withdraw a lump sum amount provided the balance remaining is sufficient enough for you withdraw an amount not less than 50% of your annual remuneration as at the date you retired.

(d)         As mentioned above, if you retired before 5o you can be paid 25% of the balance in your RSA provided that such withdrawals shall only be made six months after you retire and you do not secure another employment.

What happens when an employee dies?

This is captured under Section 5 of the Act. Where an employee dies, his entitlements under the life insurance policy maintained shall be paid to his retirement savings account.

The pension fund administrator shall apply the amount paid under his Life Insurance Policy in favour of the beneficiary under a will or the spouse and children of the deceased or in the absence of a wife and child, to the recorded next-of-kin or any person designated by him during his life time or in the absence of such designation, to any person appointed by the Probate Registry as the administrator of the estate of the deceased.

What happens when an employee is missing?

Where an employee is missing and is not found within a period of one year from the date he was declared missing, and a board of inquiry set up by the Commission concludes that it is reasonable to presume that he has died . Where it is confirmed or presumed that the employee is dead, the provision of section 5 of this Act shall apply (as above “what happens when an employee dies).

This article originally appeared on September 6th, 2013. It has now been updated to include new information.

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

2 Comments

2 Comments

  1. saheed

    May 15, 2018 at 12:52 pm

    nice piece

  2. Victor Adikibe

    May 30, 2018 at 6:08 pm

    My question is where a retired employee is 51 years and he has started collecting monthly pension and along the line he gets another pensionable job, how is the remittance made? Through AVC right? Is the new company under obligation to contribute their own part of the contribution for the employee?

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Business

African leaders should support MSMEs for rapid recovery of economies – Report

African leaders would help speed up the recovery process in most African economies if they can continue to support the MSMEs.

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Development Bank of Nigeria , Companies Allied Matters Act (CAMA)

African leaders have been enjoined to promote and support policies that would strategically support the Micro, Small and Medium-sized Enterprises (MSMEs) and speed up the recovery process in most African nations.

This was stated in the Foresight Africa 2021 report, a publication of African Growth Initiatives of the Brookings Institution, a non-profit organization devoted to independent research and policy solutions.

According to the report:

  • “Policymakers must continue to support businesses—both smaller enterprises and larger firms—that have been disrupted by the crisis.
  • “Arguably, the greatest priority must be to bolster the micro-, small-, and medium-sized enterprises (MSMEs) that are key to African commerce and account for 83 percent of private-sector employment in Africa.
  • “Such businesses, which number between 85 million to 95 million, are especially vulnerable to COVID-19 mitigation measures given they are often characterized by person-to-person contact. By just May 2020, 75 percent saw their revenue decline by over 30 percent.
  • Finance will continue to be one of the greatest needs for African businesses; indeed, only 5 percent of MSMEs across the continent feel they have received adequate support from lenders. Provided governments navigate Africa’s fiscal challenges with skill and determination, they can continue offering suitable financial support to small enterprises; in addition to indirect support through value chains and banks, such assistance might include loans, debt forgiveness, low-interest rates, assistance with payments to suppliers, and reduction in utility costs.”

 Ways Governments can provide financial support to MSMEs

  • There are several steps that governments can take to provide financial support to MSMEs. One option is to assist MSMEs through larger firms in their value chains, which might include upstream suppliers and downstream buyers.
  • “Governments can provide easier liquidity and working-capital terms to these larger players, and they can make such support conditional upon these firms’ providing favourable financial terms to MSMEs.
  • “Governments can also consider providing risk guarantees or first-loss mechanisms while requiring banks to on-lend under the chosen set of criteria and guidelines in order to encourage banks to lend to MSMEs.
  • “Policymakers must not lose sight of the region’s informal sector, as 84 percent of African MSMEs are unregistered. Policymakers can take advantage of the opportunity created by the crisis to convince larger numbers of informal enterprises to register, and thus gain better access to finance and markets. Moreover, to promote registration, governments could shape bold campaigns and attractive packages, potentially including multi-year tax holidays and capacity building for MSMEs.”

Why this matters

  • Micro, Small and Medium-sized Enterprises (MSMEs) are widely recognized for the important contributions they make to sustainable development, in terms of contributions to economic growth, creation of jobs, provision of public goods and services, as well as poverty alleviation and reduced inequality.
  • The pandemic has seriously impacted the MSMEs in all African nations as it has exacerbated economic hardship and may have pushed more than 40 million Africans into extreme poverty.
  • It is imperative that the African leaders focus on enabling businesses to respond effectively to these new and unfavourable conditions to which most MSMEs have been exposed to.

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Personal Finance

How to fund your business without a debt sentence

The lack of funding is a great excuse for people who are not really ready to start a business. 

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5 things you can do to attract equity funding for your business

According to Mark Cuban, one of American’s entrepreneurs, owner of Dallas Mavericks, and TV Personality, the biggest mistake most people make is to think that they have to raise money to start a business.

As a financial advisor, I totally agree with Mark. There is no such thing as a successful business that became successful because of funding. Yet every week I receive tons of emails asking for advice on how to raise money or if I would invest in their businesses.

The answer always is “No” and you will discover the reason at the end of this article.

While I understand that certain businesses genuinely do need funding, and while funding is necessary at certain stages in a business, I do not think that every business needs funding to get started. And in fact, the majority of funding needs are not real funding needs, but the lack of ability to create money from thin air.

Most Funding requests are disguised gap in creativity and sales skills. Because with the right sales and creative skills, you can create the amount of money that you want. And you can also break down your business into the version that you can fund with your own money.

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Thus funding problem is majorly disguised creativity and sales problems. And quite frankly the lack of funding is a great excuse for people who are not really ready to start a business.

I know this because great entrepreneurs are not stopped by funding challenges. And the greatest entrepreneurs in the world all started in spite of funding challenges.

Amazon started out from the garage of Bezos’ in Bellevue, Washington. He started out with funding of almost $250,000 from his parents.

Facemash now Facebook started in 2004 by Mark Zuckerberg and a group of friends. They started out with sweat equity, technical skills, and the ability to sell their idea and build a solid community.

Apple started out in Jobs’ garage on April 1, 1976, by college dropouts Steve Jobs and Steve Wozniak. They started their business with sweat equity, technical skills, and the ability to sell a not so perfect Apple 1 product without a monitor, keyboard, or casing.

Bill Gates and his business partner Paul Allen built the world’s largest software business, Microsoft, from technological innovation, keen business strategy, and aggressive business tactics.

You will find a similar story for Elon Musk, Mark Cuban, Richard Branson, Dangote, and so on.

These men built their businesses from the ground up with sweat equity, the right attitude, personal savings, or support from families. Funding did not stop them and funding will not stop you if you are serious about entrepreneurship. Quite frankly funding at the early stage of a business increases business stress, dilutes control, and expands leadership complexity.

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So while you may fantasize about some strange investor sent by God coming along. To lift your business off the ground. In reality, this rarely happens. You must find ways to fund your way to a proven business model. Investors rarely fund ordinary ideas or struggling businesses. They fund businesses that are already succeeding but need funding to expand that success. This is why banks rarely lend to SMEs but do so easily to successful businesses. And why the majority of successful business owners started off on their own

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So why do people still waste time looking for funding?

People gravitate towards funding for three reasons. The first is the Fantasy of overnight success. The second is the desire to use another person’s money to fix fundamental problems. That can only be solved through discipline and hard work. And the third is to make an already successful business even more successful.

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Among these three reasons, only one is of interest to the investor.  Investors are not on a mission to rescue your business or make you rich. They are on a mission to increase their wealth and achieve more financial success. They will only invest in businesses that can help them achieve their goals. And until your business develops this capacity you are not yet funding worthy.

Thus the only purpose for funding is to transfer investor’s idle funds or funds that are less optimized to a profitable business vehicle. That has the capacity to generate higher profits. This means that your business must have the capacity to turnaround investors’ money very quickly. If your business is not yet at this stage. You should focus on bringing it up to this stage and then attracting investor’s funding can become easy for you.

The key to successful funding is to answer the three funding questions. First, is my business fundable? Second, do I need funding for wealth-creating purposes? And third is my business at the stage where it can turn around investors’ money without losing it? Answering these questions is key to funding your business.

A business is ready for funding when it has certain key attributes. There are seven key attributes that attract investors and make a business funding worthy.

 

Watch out for the next part of this interesting series


About author

Grace Agada is The Senior Financial Happiness Director @ Create Solid Wealth. She is an Author and Column Contributor in Six National Newspaper. She is a contributor at BellaNaija, Nairametrics and Proshare and she is on a mission to help working-class professionals and CEOs become more financially successful. To learn more about Grace and how she can help you send an email to [email protected]

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Personal Finance

How to reduce your electricity bill in Lagos

Find out a few tips on how you can reduce your electricity bill.

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With the recent hike in electricity tariff, everyone is looking for ways to cut costs, especially if you already have a prepaid meter installed at home. Currently, the new tariff increase since October 2020 is over 100%, meaning everyone would start paying twice what they previously paid.

Things are hard enough as it is especially in a place like Lagos, and if you don’t plan to pay double, you have to adjust accordingly. Although you would certainly pay more, but knowing how to reduce your electricity usage in Lagos would do you a lot of good. Read on to find out a few tips on how you can reduce your electricity bill.

READ: How to own your home in 5 years without a mortgage

How to Reduce Your Electricity Bill in Lagos

To start with, you should know that for these tips to work for you; you need a prepaid meter installed. Without a prepaid meter, your bill pretty much runs on estimates and leaves you with little room to contest its accuracy. If you want to save power, start by getting a prepaid meter installed at home.

After that, here are a few tips on how to reduce your electricity bill in Lagos:

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READ: Buhari moves against DISCOs that collect money for prepaid meters

1. Sniff out background power consumption:

Many don’t know this, but turning off a device while leaving it plugged in does not cut off the power supply. The device still consumes residue energy called vampire or stand by power. To avoid this, cut off power to a device by turning off the socket and the device’s power switch.

2. Replace all your bulbs at home with energy-efficient models:

Although non-energy-efficient bulbs are cheaper to purchase, they become more expensive in the long run to use. This is because they consume far more power than energy-saving bulbs. For example, the average wattage of an ordinary bulb is around 60 to 200. However, energy-saving bulbs are as low as 7 to 11 watts. This means that one would consume more than ten times the other’s power; the choice is yours. Also, it would help if you become more cautious with how long you leave your bulb on. Turn them off during the day, and when you want to sleep at night; especially your kitchen, toilet and bathroom lights. Only leave security lights on.

READ: Eden Life set out to automate domestic chores for busy people – CEO

3. Limit your fan and Air conditioner’s runtime:

The ceiling fan is one of the home’s highest passive power consumers. You might not know it, but your fan practically runs all day and night, which significantly impacts your power bills. One thing you can do is replace all your fans with energy-efficient models if you have the means. However, if you don’t have the energy-efficient model, simply regulate how long the fan runs. The energy-consuming capacity of an air conditioner is well known. Keep it running for a day, and it would make a telling impact on your bills. A 1.5hp (1119watts) Ac running for 10 hours at a rate of N60 per kilowatt would cost you well over N30,000 alone. You can shuffle run time between your fan and air conditioner, depending on how many units you purchase per month. Limiting your fan to running only about 8 hours a day can save you hundreds of naira.

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READ: FG to revive 3 power projects in Abia by first quarter 2021

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4. Revisit your refrigerator:

This is another appliance that consumes the most power at home. The average watt consumption of a refrigerator is 1200 watts per day (depending on the model), which means they consume one of, if not the highest power at home. You can reduce consumption by purchasing a smaller freezer, which is the more expensive approach or doing the following:

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  • Move the refrigerator to an area with adequate air circulation, as it helps it become more power-efficient.
  • Your fridge should also be at least 2 inches away from the wall and not stand directly exposed to sunlight.
  • Another thing you should do is not stuff up your refrigerator. This reduces the overall efficiency of the unit because of the lesser space available for air circulation. It also means that the unit would draw more power to meet the demand. Ensure you defrost the fridge regularly too

READ: Strategies to Reduce Expenses and Save Money

Asides from the tips mentioned in this article, you should also sit down to study your home. If possible, create a list of all your appliances and their watt rating. Start trimming down consumption by replacing the device with a more energy-efficient model, or reducing its use.

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