Additional Voluntary
Contributions

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About AVC

What are Additional Voluntary Contributions (AVCs),
and how can they help me?

Additional Voluntary Contributions are extra funds you can opt to add to your mandatory pension contributions, or simply set aside as retirement savings. These funds would be deducted from your monthly emolument by your employer and remitted into your ARM Pensions Retirement Savings Account (RSA), along with your regular pension contributions.

AVC differs from other regular savings you may have, as it is deducted from your salary before tax. This is a significant advantage of the AVC, as it means the contributions are tax-free and lower your overall tax liability.

What are the benefits of AVC?
How can AVC help me?

Benefits of AVC

Additional Voluntary Contributions are pooled into the ARM Pensions RSA Fund and, therefore, are invested and managed in the same rigorous manner as your regular pension contributions.

An additional advantage, and a major difference from regular pension contributions, is that you are at liberty to decide the amount you wish to contribute, in addition to the frequency of the contributions; e.g. monthly, quarterly, bi-annually or annually.

You can also withdraw from, or liquidate, your AVC at any time. Note, if a withdrawal/liquidation is made within five years after the AVC was remitted, there will be a tax charge as tax exemption only applies to contributions that remain invested for a minimum of five years.

In addition to boosting your retirement funds, AVC can also serve as a form of targeted savings towards specific projects, such as, mortgages, children’s school fees or a dream vacation.

The ARM Pensions AVC is managed by our experienced professionals and, therefore, would enjoy our noted investment management expertise.

The table below provides an illustration of the potential benefits of saving through the AVC scheme, compared to saving through regular contributions into a deposit or savings account.

  Option 1:
Regular Savings
Option 2:
AVC
 
Gross income per month 500,000 500,000  
Savings (AVC) 0 -100,000  
Taxable income 500,000 400,000  
Tax (15%) -75,000 -60,000  
  425,000 340,000  
       
Savings (Direct) -85,000 0  
Net Cash Position 340,000 340,000  
Number of years Future Value (1) Future Value (2) Additional Accumulated Savings
5 6,941,922 8,166,967 1,225,045
10 19,553,289 23,003,869 3,450,580
15 42,464,317 49,958,020 7,493,703
20 84,086,706 98,925,537 14,838,830
25 159,701,963 187,884,663 28,182,699

Assumptions:
1The rate of return is 12% per annum under both types of savings
2The saving are regular monthly contributions over the stated number of years

The above illustration shows two possible scenarios: regular savings (Option 1) and AVC (Option 2), with the same gross income per month of N500,000. The key differences and advantages of AVC illustrated above are:

Savings are on a pre-tax basis through AVC, but on an after-tax basis through regular savings.

Saving via AVC results in lower taxable income, which, in the example above is N400,000 compared to a higher taxable income of N500,000 through regular savings.

Based on the lower taxable income resulting from AVC, with the same tax rate of 15%, the cash paid as tax is N60,000 vs N75,000 based on regular savings. In effect, with the same gross monthly income of N500,000, the individual’s effective tax rate is reduced to 12% from 15%.

In order to end at a similar net cash position of N340,000 in the two scenarios above, the highest amount that can be set aside through regular savings is N85,000, which is significantly less than the N100,000 saved via AVC.

Based on the extra N15,000 saved through AVC on a monthly basis, the AVC savings option leads to significantly higher accumulated savings over time.

The higher your marginal tax rate, the higher the tax benefit you enjoy from AVC, all else equal.

In summary, in addition to providing an avenue to set aside more funds towards retirement, the tax incentive is another key attribute of the AVC Scheme. The AVC scheme is fully backed by the Pension Reform Act, 2004; therefore, you can be rest assured that your Additional Voluntary Contributions are safe and in the right hands.

How to go about it?

Every employee covered under the contributory pension scheme is eligible to make Additional Voluntary Contributions. All you need to do is inform the relevant department in your organization (e.g. Human Resources or Finance) about your desire to make voluntary contributions, stating the amount and frequency.

In the event you decide to withdraw from, or liquidate your AVC, all you need to do is complete and submit our benefit withdrawal form, attaching a passport photograph and letter requesting for your funds. Your application will be processed and benefits paid within 2 weeks.

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