Managing one’s [personal] finances cannot be complete without a suitable retirement or pension plan. The main aim of pension schemes is to provide financial support during old age or retirement. Certainly, there comes a time in a person’s life when he would not have the strength to continue working. Even if one has the strength to keep working, he may be limited by statutory age requirement. As a reference, the statutory retirement age in Ghana is 60 years. Thus, there may come a time when we no longer receive regular income from our jobs. During this time, a retirement plan remains one major source of income.
Unfortunately, the basic [government] retirement scheme may not be adequate to cater for the growing needs of most retirees. You may have witnessed a number of pensioners complaining about inadequacy of their pension benefits. Surely, the needs of contemporary retirees go beyond just food, clothing and shelter. Modern retirees desire to have access to good healthcare, reliable internet service, exciting recreational activities and many more. Some retirees would even like something to spare for charity and gifts. Yes! Being retired does not stop one from giving, especially in our African community. Besides, a number of pensioners may still be taking care of their kids during retirement.
Obviously, the basic needs of retirees appear to be increasing in modern times. Thus, having a backup pension such as a personal pension scheme would be beneficial. A few workers already have access to other backup pension funds which are mostly provided by their professional unions. A typical example is Teachers fund, which is a retirement supplement scheme for the Ghana National Association of Teachers (GNAT). Essentially, a supplementary or personal pension scheme may provide additional financial support for many individuals to cope with their continual retirement needs.
What is a personal pension scheme?
By definition, a personal pension scheme is a type of pension plan where individuals personally contribute towards their retirement. A personal pension scheme can be considered as a private investment plan to cater for one’s future. This can be useful to the majority informal-sector employees who do not normally have access to the mandatory primary pension schemes.
Unlike the traditional pension plan (Social Security) we know of, a personal pension plan is an agreement between the contributor and a pension provider of his choice. That is, individual pension contributors have the option to choose their preferred pension provider. In a way, personal pension schemes allow contributors to determine where their pension money must be invested.
Before the Ghana pension reform in 2008 (covered in the next section), pension contributions from employees were solely managed by the Social Security and National Insurance Trust. This, to some extent, put pension contributors at the mercy of any financial decision made by SSNIT, whether good or bad. With the introduction of the three-tier pension scheme, employees have the added advantage of a personal pension provided by private pension institutions, most often insurance companies.
Overview of 3-Tier pension scheme
In 2008, a new pension Act was passed in Ghana. The new Act mandated a three-tier pension scheme to replace the old pension. The minimum age at which one qualifies to contribute to the new pension scheme is 15 years.
Implementation of three-tier pension scheme began in 2010, with the National Pensions Regulatory Authority (NPRA) as the regulator. The main similarity between the three tiers is that they are all tax-exempt and defined-contributory. In a defined contribution plan, the final payment to the contributor is calculated based on his total pension contributions and the performance of the pension fund. The Ghana pension act also permits tax exemption on all pension contributions as long as the total contribution is not more than 35% of an employee’s salary. For example, an employee who earns a monthly basic salary of GH¢500 would be permitted to contribute a maximum of GH¢175 (tax free) to his pension account.
Differences between Tier 1, Tier 2 and Tier 3 pensions
Tier One is the primary social security scheme managed by the Social Security and National Insurance Trust. As usual, pension contributions for Tier 1 are mandatory for employees. The pension Act mandates that 13.5% of employees’ salaries be contributed to the scheme on their behalf. Pension benefits for Tier 1 scheme consist of monthly payments to qualified pensioners.
Tier Two, also a mandatory scheme, requires employees to contribute 5% of their salaries. Contributions are however managed privately by Trustees licensed by the NPRA. Benefits from Tier 2 pension are paid as lump-sum to employees upon retirement, which consist of all contributions and profits earned.
Tier Three is an optional pension scheme which comprises all other provident and pension funds besides Tier one and two. For individuals interested in personal pension schemes, Tier three offers the option to make additional tax-free pension contributions from their basic salaries. While this is voluntary, there is however a limit to how much workers can contribute. If you would recall, it was previously stated that not more than 35% of an employee’s salary can be contributed to a pension scheme. Now, since the contributions to Tier 1 and Tier 2 add up to 18.5% of workers’ salaries, they are therefore left with a balance of 16.5%. [That is, 35-18.5 = 16.5] Thus, Tier three pension limits pension contributions to a maximum of 16.5% of employees’ basic salaries. This is still good considering the tax exemption benefits that come along with it. For instance, an employee who earns a monthly income of GH¢1000 can additionally enjoy a tax exemption on GH¢165 if he fully utilise his Tier 3 pension privilege (That is, 16.5% of GH¢1000). This can obviously offer a relief from income tax.
Note that the income tax rate in Ghana ranges from 5% to 25% for anyone whose monthly pay exceeds GH¢216. Refer to the table below to get an overview of income tax rates in Ghana.
Tier 3 pension is opened to both formal and informal sector workers. As contributions made to the scheme are tax-exempt, contributors are therefore required to stay in the scheme for a minimum period before any withdrawal. The current minimum period before withdrawals from Tier 3 pension schemes can be made is 10 years. Nevertheless, individuals who prefer to withdraw prematurely from the scheme (before the 10-year period) can do so with some charges. Premature withdrawals from Tier 3 pension are charged with a marginal tax rate of 15% on any amount withdrawn.
Withdrawing all contributions before the 10 years also depends on the policy of the pension provider. For instance, Metropolitan personal pension scheme allows members to withdraw maximum of 50% of total contributions every three years. Enterprise personal pension scheme similarly limits partial withdrawal to 50% of total contributed fund.
Unfortunately, a few number of personal pension providers (for the Tier 3 scheme) set a limit on the minimum amount that can be contributed. For example, the minimum monthly contribution to Metropolitan personal pension scheme is GH¢50. Likewise, the minimum monthly contribution for Pentrust personal pension plan is GH¢200.
How the pension schemes are managed
To ensure transparency, management of the three pension schemes are delegated to three independent service providers. The NPRA still remains the overall top regulatory body. There are three types of service providers, which are:
- Pension Trustees
- Pension Fund managers
- Pension Custodians
Pension trustees have the administrative responsibility of both Tier 2 and Tier 3 pension schemes. Trustees ensure that investment objectives of pension contributors are followed. Trustees are mandated to appoint pension fund managers, custodians and other service providers to help manage the schemes. However, they do not have access to the contributors’ funds.
Pension fund managers are responsible for investment decisions mandated by the Trustee. The fund manager reports regularly to both the Trustee and NPRA but does not have direct access to the pension funds.
Pension custodians are responsible for safe possession of pension funds and assets. Unlike Trustees and fund managers, custodians have access to pension funds since they receive pension contributions from members. Just like pension fund managers, custodians report regularly to both Trustees and the NPRA.
List of licensed Trustees for personal pension schemes
There are currently about 34 Trustees licensed by the National Pensions Regulatory Authority. These are made up of insurance companies and other corporate service providers. The list of licenced Trustees includes:
- Petra Trust Company Limited
- Metropolitan Pensions Trust Ghana Ltd.
- Enterprise Trustees Ltd.
- Axis Pension Trust Limited
- General Trust Company Limited
- Provident Life Trust Company Limited
- Glico Pensions Trustee Company Limited
The full list of licensed Trustees can be downloaded from the link below:
Approved fund managers for personal pension schemes
There are about 78 pension fund managers approved by the NPRA. Notable of them include:
- Databank Asset Management Services Ltd.
- EDC Investments Limited
- SIC Financial Services Limited
- SAS Investment Management Limited
- New Generation Investment Services Limited
- HFC Investments Services Limited
- Gold Coast Fund Management Limited
- FirstBanC Financial Services Limited
Full list of approved pension fund managers can be downloaded from the link below: