There are five highlights of the Pension Reform Act signed into law July 1, 2014. It repeals the Pension Reform Act 2004.
The new Act regulates the administration of the contributory pension scheme for both the public and private sectors, raises the minimum rate of contribution, and gives access to 25 per cent of contribution before age 50.
The Act provides access to mortgage, punishment for defaulting employers, and subjects to taxation voluntary withdrawal of contributions within five years from the date contributions were made.
Below are five of the issues contained in the Act that may impact the retirement savings account (RSA) holder.
Upward review of minimum contribution
Section 4 (1) of the Act raises minimum pension contribution from 15 per cent to 18 per cent of monthly emoluments; 8 per cent contributed by employee and 10 per cent by employer.
Much as this provides additional benefits and improvement in the pension benefits to employees at retirement, employers have to be compelled to implement the upward review.
Over the years, some employers have failed to make contribution or shortchanged workers by contributing less than required.
Access to contribution before age 50
Section 7 (2) allows an individual who voluntarily retires, resigns or is disengaged from employment to withdraw up to 25 per cent of the retirement savings account (RSA) balance if unable to secure another job within four months.
Previously, only individuals involuntarily disengaged from employment could access 25 per cent of benefits after remaining unemployed for six months.
Tax on voluntary contribution withdrawals
Only the income earned on voluntary contributions is subject to tax at the point of withdrawal within five years from the date the contributions are made. This is clarified in Section 10 (4) of the Act.
However, contribution withdrawn after five years from the date the contribution is made will still be tax free.
Access to mortgage
Section 89 (2) provides that a Pension Fund Administrator (PFA) may, subject to guidelines issued by the National Pension Commission (PenCom), apply a percentage of the pension assets in a retirement savings account to pay equity contribution for a residential mortgage by the account holder.
The guidelines are still being awaited.
Sanction for defaulting employers
Section 11 (6) says an employer who fails to deduct or remit the contributions of its employees within seven working days from the date salary is paid, in addition to making the remittance already due, is liable to a penalty to be stipulated by PenCom.
Section 105 (1 & 2) empowers PenCom, subject to the fiat of the attorney general of the federation, to institute criminal proceedings against employers who persistently fail to deduct and/or remit the pension contributions of employees.
