Tier 3 Pension Scheme Tax Benefits

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.
  1. What is Tier 3 Scheme?
It is a voluntary pensions scheme managed by private sector trustees licensed by the National Pensions Regulatory Authority (NPRA).
  1. Who can contribute to this Scheme?
Both the employer and an employee can contribute to this scheme.
  1. 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.
  1. 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.
  1. Who manages this Scheme?
Trustees authorized by the National Pensions Regulatory Authority manage Tier 3 schemes.
  1. What happens when an unregistered trustee manages the scheme?
The contributor will not get any tax relief for the contributions made.
  1. 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.
  1. 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.
  1. 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