What You Need to Know about Tier One, Two and Three Pension Schemes

    PEN
    A pension 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 in the form of periodic payments.
    The Pensions Act of 2008 established a three-tier pension scheme consisting of three levels of contributions:
    TIER 1: A mandatory basic national social security scheme.
    TIER 2: A mandatory occupational pension scheme that is fully funded and privately
    managed.
    TIER 3: A voluntary provident fund and personal pension scheme — also fully funded and privately managed.
    The First Tier/ Tier One 
    This tier is a mandatory scheme that is managed by the Social Security and National
    Insurance Trust (SSNIT). The contribution amount due is 13.5% of the employee’s basic
    monthly salary. The employer pays 13% and the employee pays 0.5%.
    This amount is paid to SSNIT. Note that the employee gets tax relief on the percentage he/she personally contributed — i.e. the 0.5%.

    The contributions for any given month are due no later than 14 days after the end of that month.
    So, effectively employers will pay their previous month’s contributions to SSNIT on the 14th of every month. Both the employer (the organization) and their employees must be registered with SSNIT for this to work though.
    SSNIT will assign the organization an Employer Registration Number (ERN) once registered.
    The employees on the other hand will receive Social Security Numbers if they don’t already
    have one — i.e. they haven’t previously registered with SSNIT.
    To register with SSNIT, an employee will need to provide their basic information and a valid
    ID card. Employers on the other hand need to complete this checklist in order to be
    registered.

     


    The Second Tier/ Tier Two
    The second tier is also mandatory but unlike the first tier, it is managed by Private Pension
    Service Providers (PSPs). The contribution amount due is 5% of the employee’s basic
    monthly salary. This cost is borne by the employee.
    This 5% plus the mandatory 0.5% makes 5.4% borne by employees out of the total of 18.5%

    The employee gets a tax relief for Tier 2 contributions, i.e. the contribution gets deducted from the employee’s basic salary before the salary gets taxed — effectively reducing the amount of tax the employee pays.

    The main distinction here is that the contribution is not paid to SSNIT, but rather, the employer is allowed to select their preferred Pension Service Provider.

     


    This gives employees a chance to earn higher rates of return on their investment, usually
    above what SSNIT offers.

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    The Third Tier/ Tier Three 
    Just like Tier 1 and 2, we have Tier 3 which one can contribute and claim on or before
    retirement.

    However, with tier 3, you can go in for your money at any time (i.e within one year or more) but with the condition.

    The purpose of Tier 3 is to instil saving habits among Ghanaian public/civil servants.

    Therefore one has up to a 16.5% (maximum) tax-free gross salary contribution to make.
    Meaning, if your current tax is GHS 321.5 and you opt for Tier 3 (7.5%), your tier 3 amount must be deducted first before tax is slapped on the remaining money, hence your new tax must be far less than GHS321.5 (around GHS200+).

     


    This is a voluntary provident fund and personal pension scheme.It is supported by tax benefits to provide additional funds for workers who want to make voluntary contributions to enhance their pension benefits.

    Any contribution up to 16.5% of one’s basic monthly salary towards Tier 3 receives a tax
    break, i.e. income is taxed after Tier 3 contributions.

    However, any amount over 16.5% is still considered taxable income. This is one of the many advantages that Tier 3 schemes have over traditional savings products like fixed deposits or mutual funds.

    Like Tier 2, this tier is also managed by Private Pension Service Providers (PSPs).
    Note that tax reliefs are only available for contributions up to 16.5% of the employee’s basic monthly salary.

    While the employee can choose to contribute above this threshold, the excess does not qualify for any tax reliefs.


    The employee enjoys tax reliefs by having the contribution amount deducted from their basic salary before it gets taxed.

     


    CONDITIONS
    Tier 3 is tax-free therefore if you want to claim your money before 10 years time, the government will tax it accordingly.

    However, if it is up to ten years or more, then you can go in for your money (total amount
    contributed without being taxed)

     


    Again, if one is less than 10 years to go on retirement before starting tier 3, it will not be taxed when one retires.

    When contributing and the unfortunate happens, the money will not be taxed before given to next of kin.

    Benefits
    It can be left till retirement to supplement your tier 2 (lump sum).
    It can be used as a mortgage. Also to acquire loans in financial institutions etc.

    NB: 1. If you are contributing TIER 3 and your tax remain the same or not reduced, then
    surely you are been lured or deceived.

    Tier 3 is managed by Unions under the supervision of NPA. Each union appoints its own independent fund manager (E.g. Glico, Pension Alliance Trust, etc.) to manage the fund and is supported by a board of trustees from the union (Union members).

     


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