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Pension Scheme in Nigeria 2021 Update See Important Facts to Know

Filed in Articles, Banking, Banking Guide, Insurance by on April 15, 2021

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What is Pension Scheme in Nigeria? Or, Are you thinking about where to place your pension? If yes, then listen. Before looking at pension as an option for your retirement, you need to understand how the pension schemes in Nigeria works.

In other words, you need to first know what is a pension. In this article, attempts have been made to elucidate what a pension is.

Pension Scheme in Nigeria 2021 Update See Important Facts to Know

Before looking at the pension scheme in Nigeria, note.

The word pension is derived from the word pɛnʃən. This is from Latin pensiō, meaning “payment”. It is a fund into which a sum of money is added during an employee’s employment years. And from which payments are drawn to support the person’s retirement from work.

Also, it comes in the form of periodic payments. Furthermore, the pension may be a “defined benefit plan”. Where a fixed sum is paid regularly to a person. Also, it is a “defined contribution plan”. Under which a fixed sum is invested that then becomes available at retirement age.

However, pensions should not be confused with severance pay. The former is usually paid in regular installments for life after retirement. While the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.

How the Pension Scheme in Nigeria Works

Nigeria, the Pension Reform Act 2014 (PRA) governs the framework. Also, it governs the procedure for pensions. The PRA establishes a Contributory Pension Scheme. Here, the employers and the employees contribute the minimum percentages of the employees’ salaries.

The above is done every month. Also, the minimum contribution for the employer is 10%. And it is 8% for the employee. And this money goes into what is known as a Retirement Savings Account.

Pension Scheme in Nigeria: Who is Entitled to a Plan?

Below is information on who is entitled to a pension scheme in Nigeria?

  1. A worker working in the public sector is entitled to a plan.
  2. Also, a worker in a private company with over 15 workers is entitled to a plan.
  3. Additionally, a worker in a private company with less than 3 workers (or are self-employed), is entitled to participate in the scheme. However, this subject to Pension Commission guidelines.
  4. Furthermore, if you are a worker in a private company with more than 3 workers, and less than 15 workers, note. The law is sadly silent on your status.

Having a pension plan is one of the most secure insurance policies for your future upon retirement. And it is important that when you are about to start a new job, you ensure that a pension plan is part of your package.

Pension Scheme in Nigeria: How Pensions are Managed

The PRA 2014 establishes a body called the National Pension Commission (NPC). And the job of the NPC is to enforce and administer the pension regulations. This is as laid out by the PRA 2014.

Also, it regulates two types of companies – Pension Fund Administrators (PFAs) and Pension Fund Custodian (PFCs). And the employee is meant to choose a PFA to manage his/her pension. Also, there are a number of registered PFA in Nigeria. Thus, there is a variety of choices.

Also, once the PFA is chosen by the employee, note. He/she needs to inform the employer. However, what then happens next is when the pension contributions are deducted, they are paid to the PFC specified by the PFA.

More Facts on How Pensions are Managed in Nigeria

The PFC upon receipt of the contribution, then informs the PFA. And the PFA then credits the Retirement Savings Account of the employee.

However, if the employee changes jobs, note. The law provides that the employee can keep his account with the PFA if he so wishes.

However, he can switch to another PFA. But not more than once a year. So, you might ask, what happens to your pension contributions when they are deducted? Do they just sit in the account until you retire and can withdraw them? The answer is no.

The PFA takes the funds and invests them in certain approved investments. This is strictly monitored by the Pension Fund Commission. However, this is with substantial fines and penalties available for erring PFAs.

Pension Scheme in Nigeria: How to Access Your Pension

Well, first things first, note. Employees are not allowed to access the Retirement Savings Account. However, this is until they retire or attain the age of 50 years.

Thus, if you retire at 35, note. You cannot access the account until you are 50 years old.

Also, if you are 55 years and still working, note. You cannot access the account until you retire.

And upon retirement, the individual is able to utilize the amount credited to his retirement savings account. This can be used for the following benefits:

  1. Withdraw a lump sum from the total amount. However, provided that the amount left after the lump sum withdrawal is sufficient to procure a ‘programmed fund withdrawals or annuity for life’
  2. Also, programmed monthly or quarterly withdrawals. As calculated on the basis of the expected life span.
  3. Additionally, an annuity for life purchased from a Life insurance company.

Please note. The 50 years/retirement rule is the general rule. However, there are exceptions. This is so provided if the person leaves employment before age 50 for medical reasons. Or if he/she does so in accordance with the terms and conditions.

What Happens to Employers Who do not Remit

It is mandatory for your employer to remit the pension contributions. Thus, any non-remittance or late remittance is illegal. And the penalty is the payment of the amounts which are due to be paid. Also, plus not less than 2% of the amount due.

As such, if your company has not remitted 3 months’ worth of contributions totaling – N300,000, note. They are still liable to remit the N300,000 plus an additional N6,000 as a penalty.

Finally, what’s your take on the pension scheme in Nigeria? Share with us in the comment section. However, if you have found it useful please share with friends and relations using the share button below

CSN Team.

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