Our payroll team gets questions on Tier 3 Pension Scheme tax benefits. In this article, we discuss the frequently asked questions Tier 3 Scheme and its tax benefits.
- What is Tier 3 Scheme?
It is a voluntary pensions scheme managed by private sector trustees licensed by the National Pensions Regulatory Authority (NPRA).
- Who can contribute to this Scheme?
Both the employer and an employee can contribute to this scheme.
- Is it mandatory for the employer to contribute to this Scheme?
No, it is a voluntary pension scheme so the employer can decide not to contribute to this scheme.
- How much can one contribute towards this Scheme?
There is no limit to the amount either the employer or the employee can contribute to the scheme. But there is a limit to how much tax relief you can claim.
- Who manages this Scheme?
Trustees authorized by the National Pensions Regulatory Authority manage Tier 3 schemes.
- What happens when an unregistered trustee manages the scheme?
The contributor will not get any tax relief for the contributions made.
- Who chooses the Trustee?
- If both the employer and employee contribute to the pension scheme, the employer can choose the trustee to manage the contributions.
- If only the employees make contributions, the employees choose the trustee to manage their contributions.
- What are the benefits of this Scheme?
- The government allows up to 16.5%of the employee’s monthly basic salary as a tax relief and treated as a deductible expense. See point 10 – Tax benefits of Tier 3 Illustrated.
- Where the scheme permits, a member may withdraw funds to take a mortgage for his primary residence. Such withdrawals are not subject to tax.
- The contributor gets a tax-free lump sum upon retirement.
- Are withdrawals from the Scheme taxable?
Withdrawals from the scheme are not taxable if:
- The withdrawal is after ten (10) years of contributing to the scheme.
- If the withdrawal is for taking a mortgage for a primary residence.
Withdrawals from the fund before the tenth year, for any purpose other than getting a mortgage, is subject to tax at a rate of 15%.
- Tax benefits of Tier 3 illustrated
You get a tax relief for contributing to Tier 3. The examples here show the effect of contributing to Tier 3.
Scenario 1
A earns a basic salary of GHC 5000 per month. He is a member of a Tier 3 Scheme to which he contributes GHC 900 per month
| GHS | |
| Basic Salary | 5,000.00 |
| Allowance | 200.00 |
| Total Income | 5,200.00 |
| Less Relief: | |
| Employee SSF | 275.00 |
| Tier 3 Relief (16.5% of Basic) | 825.00 |
| Total Relief | 1,100.00 |
| Chargeable Income | 4,100.00 |
| Tax Payable | 687.00 |
A gets a tax relief of GHC 825 per month and pays a tax of GHC 687.00. Note that although A contributes GHC 900 each month, the maximum relief he can claim is GHC 825.
Scenario 2
B earns a basic salary of GHC 5000 per month. He does not contribute to a Tier 3 Scheme.
| GHS | |
| Basic Salary | 5,000.00 |
| Allowance | 200.00 |
| Total Income | 5,200.00 |
| Less Relief: | |
| Employee SSF | 275.00 |
| Total Relief | 275.00 |
| Chargeable Income | 4,925.00 |
| Tax Payable | 893.25 |
A and B earn monthly basic salary of GHC 5000 each, but B pays monthly tax of GHC 893.25 whilst A pays a tax of GHC 687.00 per month. A pays GHC 206.25 less than B because he gets a tax relief for contributing to Tier 3.
- What are the procedures in claiming one’s benefit?
The standard procedures are:
- Request for a redemption form from your trustee and complete it.
- Submit the redemption form with a valid national identification card.
- The trustee will process the claim and notify the claimant to collect payment of the claim. The claimant must produce a valid ID.
To discuss more about tier 3 pension and its benefits contact us at in**@sc*.gh or visit our website.
