How frequently is one required to contribute to the individual pension account?
There is no set frequency for contributing to an individual pension account. It is the participant's own decision. However, for better planning, it is strongly recommended that a participant contributes to his individual pension account in a systematic way.
What happens to the contributions made to the individual pension account?
Once contributions are made to an individual pension account, this amount, after charging front end fee, is credited to the individual pension account. The net amount is then used to purchase units of different sub-funds of the pension fund as per the allocation scheme selected by the participant. These sub-funds invest in equity, debt and money market instruments and earn returns in the shape of dividend, interest and capital gains. Upon further contributions, the assets belonging to a participant increase depending upon the investment performance of the pension fund.
Different kinds of returns earned by the net assets of the pension fund are explained as under:
- Dividend income: It is earned on the equity securities in which the equity sub-fund makes investment.
- Interest: Interest refers to the income earned on the debt and money market securities held by the pension fund.
- Capital gains: These are the gains/ returns resulting from purchase/sale of securities.
What is an account statement and what are the charges associated with it?
An account statement is a report in respect of an individual pension account. The statement is sent to the participant by the pension fund manager, free of charge, within 30 days of the close of June 30 and December 31 each year. The account statement consists of such information as, the amounts received or withdrawn and tax deducted; the number of units allocated and held; the current valuation of the units, etc.
Can the pension fund manager offer extra insurance/ coverage and additional benefits?
Yes, the pension fund manager may offer extra insurance /Takaful coverage or other additional benefits on a participant's enrollment to a pension fund, under the VPS. Under the insurance/Takaful coverage, the pension fund manager purchases an insurance/ Takaful policy from a life insurance company/Takaful company on behalf of the participant to provide monetary protection to the participant as per terms of the policy. The insurance/Takaful policy may be free or paid for. While the free cover is available generally to all participants, the decision by a participant to contribute to a paid insurance/Takaful cover is out of its own discretion.
If a participant, who is a salaried individual, contributes to a pension fund, will he still remain eligible in parallel, to the occupational savings schemes, if offered by his employer?
Yes, a participant, who is a salaried individual, can participate in a pension plan and remain eligible to other occupational savings scheme benefits like gratuity, provident fund, superannuation fund, if such benefits are offered by the employer.
Does the SECP guarantee the benefits under VPS?
No, being the regulator of the VPS, the SECP only monitors and regulates the activities of the pension fund, the pension fund manager and the trustee of the pension fund. The VPS is a defined contribution pension plan which means that it is prone to market risks faced by similar investments in the capital, debt and money markets. The benefits under the VPS are purely dependent on the contributions made by or on behalf of the participants and investment performance.
What is the cost of transferring the balance in an individual pension account from one pension fund manager to another pension fund manager?
There is no cost. A participant is allowed to transfer the balance in his individual pension account from one pension fund manager to another pension fund manager absolutely free of cost.
Can a participant change his pension fund manager?
Yes, a participant can change his pension fund manager once a year. It shall be the discretion of participant whether to transfer the whole of the balance or it be a partial transfer. There shall be no fee/charges payable to the existing/new pension fund manager in the event of such transfer.
How can one assess the performance of the pension fund?
The following can help assess the performance of a pension fund being managed by a pension fund manager:
The performance against the returns generated by other pension funds.
- The growth in the balance of the individual pension account over a period.
- The performance of the pension fund in comparison to the overall capital markets of the country gives you an idea of how the pension fund has performed during a period of time.
What does retirement mean under the VPS?
Under the VPS, retirement means discontinuation of the contributions and starting to receive payments out of a participant's final accumulated balance on reaching the retirement age.
What happens to an individual pension account in the event of death before retirement?
In the unfortunate event of death of a participant before attaining the retirement age, the units in his individual pension account shall be redeemed at the net asset value of the dealing day of intimation of death, and credited to his individual pension account and shall earn the applicable rate of interest on such deposits. The total amount shall then be divided amongst the nominated survivors as per the nomination deed/ nomination form. Each of the nominated survivors shall have a number of options: he shall be able to redeem the balance allocated to him subject to the provisions of Income Tax Ordinance 2001; or transfer the balance to an individual pension account to be opened with the same or a new pension fund manager; or purchase an annuity from an insurance company if nominee's age is 55 years or more; or purchase a deferred annuity from an insurance company to commence at the age of 55 years or later.
What happens if a participant dies during the period in which he is receiving payments under an approved income payment plan?
If a participant was receiving the payments from an approved income payment plan and the unfortunate incident of his death happens, the units in the individual pension account shall be redeemed at the net asset value of the dealing day of the intimation of death, and credited to individual pension account and shall earn the applicable rate of interest on such deposits. The total amount shall then be divided among the nominated survivors who shall have the options as narrated in question number 24.1.
What if a participant suffers from disability before the age of retirement and is unable to make further contributions?
If, before attaining the planned retirement age i.e., between 60 to 70 years, a participant suffers from a disability rendering him unable to continue employment and make further contributions to his individual pension account, he can elect to have reached the retirement age. It shall be mandatory for the participant to produce an assessment certificate, from a medical board approved by the SECP, confirming his disability. On retirement due to disability, the participant shall have the same options as available to him on reaching his planned retirement age. The VPS Rules list the kinds of disabilities against which a participant can claim to have reached the retirement age.
Why should a participant opt for an approved annuity plan?
An approved annuity plan is the plan approved by the SECP and offered by the life insurance companies authorized by the SECP. An annuity by its very nature can be called a financial plan that makes a regular stream of payments to the annuity holder. A participant is required to deposit a lump-sum amount with the life insurance company to purchase an approved annuity plan. Upon receipt of the amount, the life insurance company shall start paying regular income to the participant in accordance with the plan he has selected.
Why should a participant opt for an approved income payment plan?
If a participant can afford to assume risk in expectation of returns that are above moderate, he should buy an approved income payment plan. The expectation of above moderate returns implies it can work both ways i.e. a participant can experience lower payments of income as well as the returns can be above moderate.
Is it mandatory to buy an approved income payment plan from the same pension fund manager or can a participant choose another pension fund manager?
No, it is not mandatory to buy the approved income payment plan from the same pension fund manager with whom a participant is maintaining his individual pension account at the time of retirement. On attaining the retirement age, he can go to any of the registered pension fund managers and buy an approved income payment plan from him.
Can the balance be transferred from a recognized provident fund, to an individual pension account, opened under VPS?
Yes, one can make a full or partial transfer of his balance from a recognized provident fund to his individual pension account. There are no restrictions on such transfer under the VPS Rules or the Income Tax Ordinance, 2001. However, tax credit is not allowed on transfer of balance from a recognized provident fund to an individual pension account.
Is it mandatory for a participant to withdraw 50% out of the accumulated balance in the individual pension account? What if he does not want to withdraw this amount?
No, it is not mandatory to withdraw 50% out of the accumulated balance at the time of retirement. Instead of opting for the permissible tax-free withdrawal of an amount up to 50% of the accumulated balance in the individual pension account, a participant can use this amount as well for purchasing an approved income payment plan/approved annuity plan.
Does a participant get all the tax incentives in case of disability before the retirement as he shall get on reaching planned retirement age?
Yes, a participant shall get all the tax incentives if he reaches the retirement age as a result of a disability
What is a tax credit?
The tax credit is a tax relief computed by multiplying a participant's income tax rate by the amount admissible for tax credit. The maximum amount against which a participant can claim tax credit, is the lower of, his actual contribution to a pension fund during the year; 20% of his taxable income in the tax year; or Rs 1 million. Tax credit is not available in respect of balance transferred by a participant from a recognized provident fund to the individual pension account under the VPS.
Shall a participant need to pay income tax on payments received by him out of the approved income payment plan or approved annuity plan?
Yes, a participant is required to pay income tax on payments received by him out of the approved income payment plan or approved annuity plan.
Is there any tax on transferring the balance from one pension fund manager to another pension fund manager?
No. The transfers can be made, from one pension fund manager to another pension fund manager, absolutely tax-free.
What if a participant has a complaint against his pension fund manager or distributor?
If any complaint or dispute arises between a participant and his pension fund manager, it shall be referred to the Insurance Ombudsman appointed under Section 125 of the Insurance Ordinance, 2000 (XXXIX of 2000).