No two pensions schemes are the same across the world since a pensions structure must take into consideration the uniqueness of a country’s economy and dynamics of the labour force. Where countries mimic same dynamics, the pension schemes may mimic each other but will still have certain uniqueness. Consideration the dynamics of the Ghanaian labour force and its history, the introduction of the three tier pensions scheme by National Pensions Act, 2008 (Act 766) is one of the best in the world with respect to tax incentives and the envy of most jurisdictions.
Any attempt to want to tax pensions either by way of the contributions, the investment returns or the benefit pay outs under Act 766 no matter the circumstance is unconstitutional and unlawful.
MODELS OF TAXING PENSIONS
There are basically eight possible models of taxing pensions no matter the jurisdiction with respect to whether or not the contributions, investments income/returns and the benefit pay-out are taxed. The table below gives a summary of the tax models.
| CONTRIBUTION | INVESTMENT INCOME/ RETURNS | BENEFIT PAY OUT | TYPE OF MODEL | |
| 1 | Tax | Tax | Tax | TTT (3Ts) |
| 2 | Exempt | Taxed | Taxed | ETT (1E) |
| 3 | Taxed | Exempt | Taxed | TET (1E) |
| 4 | Taxed | Taxed | Exempt | TTE (1E) |
| 5 | Exempt | Exempt | Tax | EET (2Es) |
| 6 | Tax | Exempt | Exempt | TEE (2Es) |
| 7 | Exempt | Tax | Exempt | ETE (2Es) |
| 8 | Exempt | Exempt | Exempt | EEE (3Es) |
The choice of any of the models is dependent on various factors such as the state of long term savings in the country, the age structure of the labour force, the income levels of the labour force, the motivation to nudge people to put money aside towards their retirement, the need to discourage investment for retirement and the developmental agenda.
A country that has too many contributors, a youthful workforce, welfare incentives for retirees and long term funds in excess of developmental needs or investment needs will introduce model 1-“TTT”. At the other extreme, a country that now wants to encourage long term savings, has little or no welfare incentives for the retired, in need for long term funds for economic development, has high unemployment and wants to nudge the few working population to save long term will introduce model 5-“EEE”.
The “TTT” and the “EEE” models are the extremes for a developed or advanced country and a lest developed or developing country. In between we have a mix depending on the mix of dynamics playing in a particular country.
I have no doubt, the nine-member Presidential Commission on Pensions that was set up by His Excellency Mr. John Agyekum Kufour in 2004 and tasked to examine existing pension schemes in Ghana and in countries of comparable economies to recommend a sustainable scheme that would ensure retirement income security for the Ghanaian worker, especially the Public Sector worker did the right thing, having assessed the Ghanaian situation to opt for the “EEE (3Es)” tax model. Ghana, a developing country, is on a development agenda and needs long term funds, has high unemployment, has no sustainable welfare incentive for the aged, has a high proportion of her workforce in the informal sector hence needs to encourage personal pensions.
LAWS ON TAXING PENSIONS IN GHANA
- Article 199 (3), The 1992 Constitution
Under Article 199 (3), “the pension payable to any person shall be exempt from tax”.
Pension payable in pensions, include both the principal contribution and investment income/returns on investing the principal contribution making up the final pension benefit payable. The above therefore means the retirement contributions and investment income by the Constitution are to be tax exempt.
National Pensions Act, 2008 (Act 766)
The above, Act 766, then decided to break the components of pension as required by the Constitution into its constituent parts of contributions, investment income (accumulation phase) and benefit payment (decumulation phase).
Under section 89(1), “Tax is not payable by an employer or employee in respect of contribution towards retirement or pension schemes under this Act”. (emphasis mine).
The above exempts pension contributions from tax.
Under section 89(2), “Tax is not payable on the benefits received under this Act”. (emphasis mine)
The above exempts pension benefits from tax. Benefits are made up of both the investment returns received on the contributions of the worker as well as the principal contribution.
Under section 122 (5a), “A withdrawal of all or part of a contributor’s accrued benefits under a provident fund or personal pension scheme on or after retirement shall be tax exempt”. (emphasis mine)
The above reinforces the exemption of benefits with emphasis on provident funds and personal pension schemes on retirement.
Under section 104 (3), “Investment income including capital gains from the investment of scheme funds shall for the purposes of income tax be treated as deductible income”. (emphasis mine)
Investment returns on contributions invested are of course income to the contributor and ordinarily should be taxable under Ghana’s income tax laws, however the above makes it tax deductible basically meaning it is income not subject to tax.
Under section 112, “pension fund” means an “investment fund within the Pension Scheme which is
intended to accumulate during an individual working life from contributions and investment income, with the intention of providing income in retirement from the purchase of an annuity or in the form of a
programmed withdrawal, with the possible option of an additional tax free cash lump sum being paid to the individual”. (emphasis mine)
Pension funds from the above definition is made up of both contributions and investment income of scheme members. The contributions per section 89 (2) of Act 766, is tax exempt, the investment income per section 104 (3) of Act 766 is also tax exempt, the benefits which is made up of both accrued income and total contributions payable on retirement per sections 89(2) and 112 (5a) of Act 766 are also tax
exempt, making pension funds completely exempt from tax as required by Article 199 (3) of the 1992
Constitution.
- Income tax Act, (2015) Act 896
Section 93 states that, “the provisions of this division is subject to the National Pensions Act, 2008 (Act 766)”. This just means that the provisions relating to income tax as stipulated in Act 766 is what is applicable to pensions/retirement funds.
Section 94 (1) states “subject to the section 93 the standard rules for the calculation of income and taxation apply to the income of retirement fund”.
Section 94 (2a), specifically makes retirement contributions received by a retirement fund exempt from tax which is the situation even without this section.
From the above, section 94 of Act 896 subjects the calculation of taxation on income of retirement fund to section 93 of Act 896 which also subjects it to Act 766 which derives its source from the 1992 Constitution.
EXCEPTIONS
There are however certain exceptions to the exemption of tax with respect to benefit payments before the statutory retirement age.
Under sections 122 (5b) & (5c) of Act 766, withdrawals from provident funds and personal pension schemes before ten years in the formal sector and five years in the informal sector after contributions and before retirement shall be subject to appropriate income tax.
Regulations 25 of the Income Tax Regulations, 2016 (L.I. 2244) states, “For the purpose of section 94 of this Act and with reference to subsection (5) of section 122 of the National Pensions Act, 2008 (Act 766). A withdrawal from funds made to a provident fund is subject to a final tax of fifteen percent”.
Due to the COVID-19 economic hardships, the Income Tax (Amendment) Act 2023 amended section 94 of Act 896 to make withdrawals from provident fund and personal pension schemes due to loss of permanent employment before the age sixty (60) exempt from income tax in the year 2023.
CONCLUSION
Any attempt to tax pension funds is unlawful under the laws of Ghana and unconstitutional. Not even Corporate Trustees have the discretion to agree for any aspect of the fund to be taxed since they are only holding the funds in trust for the workers who are the beneficiaries.
The onus will be on scheme members to hold their specific Scheme Trustees and the Corporate Trustees who owe a fiduciary duty to scheme members legally responsible for any breach of this duty should contributions or investment income that make up the benefits payable be subjected to any form of tax, either in the accumulation (contribution collection and investment) or decumulation (benefit payment) phase
The author is a Chartered Banker and holds an LLB. He was the former CEO of National Pensions Regulatory Authority (NPRA). (Contact: [email protected])
