The New Pension Scheme - What You Must Know

I listened with utter shock the level of "unawareness" some members of the public displayed concerning the new three tier pension scheme on Joy fm. But then I thought again and realized first and foremost this is Ghana. The unfortunate truth is that majority of us are not bothered by policy changes. 

Secondly, we're 'last minute' people. We only want to know when we absolutely have to know. Hence most people have heard about the new three tier Pension scheme but are least bothered.

However, this is our MONEY which is being kept for us and I believe we should know at least the basics of the new policy and how it affects us now and in the future. 

This writes up will bring us up-to-date on the must-knows of the new three tier pension scheme. I’m pretty sure most of us know what majority of pensioners go through just to access their paltry monthly stipend from SSNIT. This and other similar developments informed the need for a radical overhaul of the entire pension system.

THE OLD SYSTEM

The old system was pretty simple. Your employer pays 12.5% to SSNIT on your behalf while you pay 5% of your basic salary for yourself. In other words, SSNIT receives 17.5% from you and your employer to keeps towards your pension until you retire. Upon retirement, SSNIT gives you an initial lump sum and thereafter you receive monthly allowance from the same institution. That’s about it. Very simple huh! See how it works below.

How the old pension scheme worked

THE NEW SYSTEM

This new system is equally simple or let’s say should be as simple by the time I’m done explaining. Don’t let the ‘Three Tier’ name scare you. Like I said earlier, the problems associated with the old scheme including people accusing SSNIT of bad investments of pension funds compelled government to take some action. A committee was set up and it recommended the set up of a three tier scheme. The idea I believe was to create some “competition” by bringing on board the private sector in the management of pension funds. 

What did government do?

Well, they increased the contributions by both employer and employee marginally by 0.5%. So now employee pays 5.5% and employer pays 13%. This makes a total contribution of 18.5% of your basic salary. Then they split the contribution in two unequal parts (5% and 13.5%). The 13.5% contribution constitutes the First Tier or Tier 1 of the scheme and the 5% is the Second Tier or Tier 2.

I can stop here and we’re good. But you need to know where these monies go. After all it’s your money. You need to know who keeps it. 

So let continue.

The tier one (T1) goes to SSNIT and tier two (T2) goes to the private sector. We all know SSNIT so I won’t talk about them. Because government wants to make sure the pension money given to the private sector is very safe and prudently utilized, it created a three point management system for the funds. This means that, three private sector companies will take care of your 5% contribution. These are the Trustee, the Custodian and the Fund Manager. They are supposed to work together to make sure your money is safe and invested properly. Amongst these three institutions, the Trustee is the one your company is most likely to deal with directly even though some exceptions may apply in certain cases.

With this new arrangement, upon your retirement, the Trustee will pay you your lump sum instead of SSNIT. The Trustee will pay you the accumulated sum of your 5% monthly contribution from your active working life. SSNIT will then pay ONLY your monthly allowances.

I’m sure you’re wondering what the Tier three (T3) is since I have not mentioned it this far. Before I even talk about the T3, I must say that T1 and T2 are mandatory schemes. Thus, every employer must pay T1 and T2 for employees. T3 however is optional or entirely voluntary. It’s also targeted at those in the informal sector even though formal sector employees can fully take advantage of it. If you choose to participate in T3, the government allows you up to 16.5% of tax exemption on your monthly contribution. Kindly note that tax is charged after your T1 and T2 has been deducted. This means you don’t pay tax on those contributions. 

Putting everything together gives us the Three Tier pension scheme. I’ll demonstrate this graphically to give us an idea what goes on in the scheme.

How the new Three tier pension works

I’m pretty sure you've gained some valuable insight into the whole pension thing now. I’d advice you ask your employer or accountant who your Trustees is. You need to know. It’s imperative. I'll publish the benefits of the new scheme in subsequent posts.

abekahbrown@gmail.com

@abekahbrown