Download What every Ghanaian employee should know about the

April, 2012
WHAT EVERY
GHANAIAN
EMPLOYEE SHOULD
KNOW ABOUT THE
NEW 3-TIER PENSION
The Pensions Act of 2008 has
introduced two new pension
ers, to operate in conjuncon with the SSNIT pension
scheme. These two new ers
provide significant benefit for
the Ghanaian worker. However, they introduce some addional risks.
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Insights | What Every Ghanaian Employee Should Know
About The New 3-Tier Pension Structure| April 2012
To fully enjoy these benefits and mini-
ing them the best way to save for
mize the associated risks, we believe
home ownership
that every Ghanaian worker should
□
know and understand the nature of the
ers to manage your tier 2 and tier 3
new Tier 2 and Tier 3 schemes. Im-
schemes will lead to better investment returns and service levels
portantly, the Ghanaian worker should
Tier 2 and er 3
Competition among service provid-
know that:
□
schemes may be
□
The use of banks as custodians of
Tier 2 and 3 schemes offer the op-
the scheme assets provide addi-
portunity for higher investment
tional safety for the scheme invest-
returns because they represent
ments and cash
investments in assets such as
u
lized at ANY
Overview of the 3-Tier Pension
The payout under both tier 2 and
The Pension Act of 2008 has introduced
tier 3 is the sum of your contribu-
two new pension tiers, namely tier 2
tions plus the investment gains
and tier 3, to supplement the SSNIT
associated with them, minus any
pension scheme. Tier 2 is a mandatory
regulatory and service fees and
defined contribution scheme1 to which
charges. As such, the benefit de-
every employee contributes 5% of their
pends on how well your service
gross salary. Tier 3 is also a defined con-
providers manage your invest-
tribution scheme; however, it is volun-
ments.
tary, and it is up to the employee and/
Because contributions to tier 3
or the employer to determine how
schemes are made before income
much of the employee’s salary will be
you paying any
tax is assessed, employees can get
contributed to this tier. Importantly,
additional tax savings by increasing
tier 2 and tier 3 schemes are managed
taxes, making
their contribution to tier 3.
by private sector trustees, licensed by
Tier 2 and tier 3 benefits are availa-
the National Pensions Regulatory Au-
ble as a lump sum and can be used
thority (NPRA). These two tiers are not
for any purpose when accessed. In
managed by SSNIT.
me as the
□
stocks, real estate and bonds
down-payment
for a mortgage
on your primary
home without
them the best
way to save for
□
□
general, tier 2 benefits cannot be
accessed before retirement. To
keep the tax savings on tier 3 con-
home
ownership
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tributions, the funds need to re-
Tier 2 and Tier 3 Advantages
— Opportunity for Higher Returns
main in the scheme for at least 10
Unlike the SSNIT tier 1 scheme2, in
years for formal sector contribu-
which the retirement benefit grows
tions, or 5 years for informal sector
with the rate of growth of your salary,
contributions; however, tier 2 and
your retirement benefits under tier 2
tier 3 schemes may be utilized at
and tier 3 pension schemes grow with
ANY time as the down-payment for
the value of the investments the
a mortgage on your primary home
scheme trustee makes. On average,
without you paying any taxes, mak-
investments in stocks, bonds and prop-
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Insights | What Every Ghanaian Employee Should Know
About The New 3-Tier Pension Structure| April 2012
erty grow much quicker than salaries
tier 3 schemes without paying taxes. As
do, leading to a higher benefit to em-
an informal sector worker you can now
ployees under tier 2 and tier 3, than
participate in the formal investing sec-
would have been available with a simi-
tor without worrying about how the
lar investment in the old one tier pen-
government will tax your hard-earned
sion scheme.
income.
— Benefits are a function of contribu-
— Lump Sum and Accessibility
tions and investment returns
The benefit from tier 2 and tier 3
Unlike the SSNIT tier 1 pension benefit,
schemes are available to employees as
which represents a fixed percentage of
a lump sum once certain eligibility crite-
your salary, tier 2 and tier 3 benefits
ria are satisfied. In tier 2, the employee
are entirely dependent on how much
may access all of their benefit on reach-
you contribute and what the invest-
ing the retirement age of 60. In tier 3,
ment gains or losses on those contribu-
formal sector employees may access
tions are. These investment gains are a
their benefit after 10 years to avoid
function of how well your funds are
paying taxes, while informal sector em-
managed, which in turn is dependent
ployees may access their benefit after 5
on the investment ability of your tier 2
years. In all cases, the benefit may be
and tier 3 trustee.
withdrawn early without having to pay
taxes, for the purpose of securing a
mortgage for the purchase of a primary
— Tax Savings
Tier 2 and er 3
pension
schemes are
run by privately
managed
companies,
working in a
home.
compe
ve
The law allows contributions into tier 2
and tier 3 to be made without the gov-
— Competition and Choice
ernment taking any income taxes on
the amount of the contribution. For
Tier 2 and tier 3 pension schemes are
formal sector workers, the tax benefit
run by privately managed companies,
from tier 2 contributions is not new, as
working in a competitive environment,
this benefit existed under the old 1-tier
and governed by industry standards
system. However, the tax benefit for
and regulations. This gives every em-
tier 3 schemes is completely new. For
ployee a say in the choice of who their
most employees, this tax savings on tier
service provider is, and the power to
3 contributions can be as large as the
ensure that selected service providers,
income from two years of investing
particularly the trustees, perform or get
without the tax saving available under
replaced. This healthy competition
tier 3.
among trustees and other service pro-
environment,
and governed
by industry
standards and
regula
ons
viders puts employees in a position to
Importantly, these tax benefits extend
enjoy better investment returns, and to
to workers in the informal sector as
expect superior service levels.
well, who can contribute up to a maximum of 35% of their gross salaries into
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Insights | What Every Ghanaian Employee Should Know
About The New 3-Tier Pension Structure| April 2012
— Private Custody
By law, employees are
Under the new law, tier 2 and tier 3
schemes are managed by trustees, but
the cash and the investments of the
given quarterly statements on the performance of their investments in er 2 and
er 3 schemes, and
The 3-tier pension structure makes it
Instead, they are held by custodians,
possible for every Ghanaian to enjoy a
which are banks specially licensed for
comfortable retirement provided the
the purpose of taking custody of
pension funds invested in the tiers 2
scheme cash and investments. This
and 3 schemes are managed properly.
structure ensures that the trustee has
As such, every Ghanaian worker should
limited ability to misuse the funds, if
have a keen interest in which trustee
they so intended.
manages their pensions and whether
Furthermore, having the scheme cash
custodian ensures that they are removed from the control of both the
government and the employer. With
tor their contribu-
the trustee offers them the best returns
possible. Ghanaians should actively
monitor their pension management so
they can enjoy the full benefits of the 3Tier structure
this structure, you can have the confidence that your benefit from tier 2 and
ons
Conclusion
scheme are not held by the trustees.
and investments in the custody of the
this helps them moni-
turns.
tier 3 will be there when you need it.
1
The SSNIT er 1 defined benefit scheme promis-
es to pay you 50% or more of the average of your
best 3 years’ salary if you have contributed to the
scheme for at least 15 years.
— Monitoring Investment Performance
2
By law, employees are given quarterly
statements on the performance of their
the pensions expert
In a defined contribuon scheme the employee
contributes a fixed amount which is invested in
financial assets. The employee’s benefit on rere-
investments in tier 2 and tier 3
ment is not a predetermined amount but de-
schemes, and this helps them monitor
pends solely on how well the investments of the
their contributions. In an event where
scheme have performed.
an employer does not contribute to the
Street Address: F304/5 | Dade
Close | North Labone
Mailing Address: P. O. Box CT
3194 | Cantonments
pension scheme, the trustee is mandated to find out why a contribution was
not made and accordingly send a statement to that employee. Also, where an
employee’s contribution is decreased
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+233 (302) 763 908
E-mail: [email protected]
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or increased, reports are sent to both
the employer and employee – this further buttresses the point that communication is key as the employee is kept
abreast with all changes that occur in
either his monthly contribution or re-
The statements expressed herein are informed opinion, speak only to the stated period, and are subject to change at any time based on market or other conditions. This publication is intended
merely to highlight issues and not to be comprehensive or to provide advice. For further information or advice, please contact Petra Trust or visit our website.
© 2012 Petra Trust. All rights reserved.
www.petratrust.com
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