Tax-free withdrawal on 3rd-tier Pension contribution is not for everyone – NPRA reveals

The National Pensions Regulatory Authority (NPRA) has issued directives regarding the withdrawals from the voluntary third-tier scheme during the COVID-19 era.  It may be recalled that Parliament made provisions within the Pensions law to allow individuals to withdraw from the third-tier funds to support themselves from hardships created by the COVID-19.

Trustees and other pension service providers had feared this would cause a ‘run’ on the voluntary third-tier funds. 

The Pensions Act of 2008 established a three-tier pension scheme consisting of three levels of contributions, namely Tier 1, which is a mandatory basic national social security scheme, whereas Tier 2 is a mandatory occupational pension scheme that is fully funded and privately managed, while Tier 3 is a voluntary provident fund and personal pension scheme.

The Third-Tier

The voluntary third-tier pension scheme was created to serve as an additional pension vehicle for formal sector workers and a major vehicle for the informal sector.  The fund offers the provisions for members to withdraw tax-free only after 10 years of the scheme’s existence, on retirement or in death.  Informal sector however has 5 years before they can withdraw from their personal savings account. 

COVID-19 has brought untold hardships.  There have been calls for government to step in and help persons who have suffered job losses at the hands of the pandemic.    

Government responded with Parliament amending the Income Tax (Amendment) Act 2015 to exempt withdrawals from third tier Provident funds and personal pension schemes from tax.  A letter sighted by Ghana Talks Business indicates a highly selective process

GUIDE ON COVID-19 INDUCED WITHDRAWALS

1. An employee due to loss of permanent employment: or
2. A self-employed person from the personal savings account provident for under paragraph (a) of subsection (2) of the section 109 of the National Pensions Act, 2008 (766), is exempt from Income tax
3. The Authority directs as follows;

• Members’ withdrawal from Provident Fund Schemes shall be limited to 15% of the member’s total accrued benefits in the scheme
• Members of Personal Pension Schemes can withdraw all the amount in their savings account
• The procedure for applying for benefits from the Provident Fund Schemes under these circumstances is as follows:
• The Employer shall submit a letter to the Trustee stating its inability to pay its workers due to the COVID-19 Pandemic thereby laying-off its workers permanently
• A Member who wishes to make a withdrawal, should do so at the Trustee’s outfit by completing the appropriate forms and attaching the relevant documents;
• The Trustee shall submit copies of the Withdrawal Application documents to the Authority through tfc-report@npra.gov.gh for approval;
• The Trustee honours the Withdrawal Application upon receipt of the Authority’s approval;
• 4) The last payment date for any Employer who is laying-off workers due to the Covid-19 pandemic should February 2020 for January 2020 contributions.

The NPRA‘s COVID-19 directives make the amended law selective for people who have really been affected and not wholesale withdrawals as previously thought

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