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Enjoying tax relief through pension, insurance subscription

By on April 4, 2011

With the right knowledge about taxation, pension and insurance, a taxpayer can enjoy some tax relief while also providing adequate cover for himself and his dependants, writes NIKE POPOOLA Aside from providing funds for the government, the essence of a good tax system in any economy is to produce an end result that will improve the welfare of the general public.

For this reason, there are statutory provisions that give some relief to taxpayers who subscribe to insurance and pension policies that can help to minimise incidences of destitution in the country.

Currently, the society is full of orphans, disabled, widows and the homeless who keep crying to the government for financial assistance.

While some of them were former workers who suffered some setbacks or did not save for their old age, many others died prematurely, which subjected their dependants to hardships.

However, as part of the efforts of the government to encourage workers to provide for their old age and protect themselves against unexpected losses, they are statutorily entitled to tax relief if they take life insurance policies and have pension accounts.

Life insurance is a contract between the policy owner and the insurance company, whereby the insurer agrees to pay a sum of money upon the occurrence of the insured individual’s death or other events such as terminal or critical illness.

Pension motivates a worker to save for his vulnerable old age so that when he is no longer in paid job, he can still live comfortably by earning income consistently.

Events have shown that dependants of deceased workers who had life insurance policies and pension accounts usually have some money to claim and move on with life, thus, reducing their burden on the society.

The major statutory provisions on tax concessions are embedded in sections of the Personal Income Tax law and the 2004 Pension Reform Act.

The immediate Past President, Chartered Institute of Taxation of Nigeria, Mr. Kamorudeen Adigun, confirmed that the country’s Personal Income Tax allowed anybody who had life insurance policy to get relief for the amount of the premium that he paid.

He said, “It is just a way of encouraging people to take life insurance. The same thing with pension, it is a way of making people to subscribe to pension. Whatever you are paying is allowed as relief, that is as a deduction before the remaining income is taxed.”

Adigun said that while paying tax as a responsible citizen in the country, the taxpayer had the advantage of a life insurance cover as well as pension security.

According to him, before the income is taxed, the payer is entitled to some relief such as personal relief, children relief and dependant/relative relief, among others.

He added, “If you have a life insurance policy as well as a pension account, you will be given some tax relief for the amount you are paying; it is a standard law in the country.”

He also pointed out that the 2004 Pension Act mandated the employer to take group life assurance cover for the employees, which also qualified the employer for another tax concession.

The Grouplife law is contained in Section 9(3) of the 2004 Pension Reform Act that states, “Employers shall maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee.”

By this, if a worker dies, the insurance company will pay his dependants three times his annual emolument.

The tax expert explained that “again, part of the requirement of the 2004 pension is that the employer should take life insurance on their employees. So by that, the employer is qualified for tax concession on the group life, while the employee is also entitled to tax concession on the individual life insurance policy.”

If anybody is having issues with understanding what should constitute his tax payment, Adigun advised that they should engage a tax professional to put them through.

Also, the Director-General, National Pension Commission, Mr. Muhammad Ahmad, who noted that many people worked in their active years but did not prepare for their vulnerable old age, advised workers to cultivate savings habit by opening a pension account.

A pension account, he added, would protect them from unnecessary hardship in their old age when they could no longer work to earn money.

He, however, added that the Act made provision for tax concession for those who were contributing into the pension accounts.

According to him, there is the section of the Act, which states that a person who engages in voluntary saving for retirement should be free from tax.

He said, “There is a section in the Act that talks about voluntary retirement savings account. As an individual, you can open an account which is a retirement savings account, so that when you retire you will benefit from it. The law allows that, it even provides tax concession.”

According to Ahmad, if the person does not withdraw the money in five years, he does not have to pay tax.

Section 9 (5) of the Pension Act states, “Any employee may, in addition to the total pension contributions being made by him and his employer, make voluntary contributions to his retirement savings account.”

Secttion 7(1) states that “any voluntary contribution made under subsection (5) of Section 9 of this Act shall be subject to tax at the point of withdrawal where the withdrawal is made before the end of five years from the date the voluntary contribution was made.”

Despite the existence of the law, Ahmad noted that only a few Nigerians had taken advantage of it.

He blamed this on ignorance and the low savings culture prevalent in the society, which was usually a function of the person’s income, cultural conditions and bills to pay, among others.

Technical Consultant, National Insurance Commission, Mr. Yemi Soladoye, said that a life insurance policy,” protects the policyholder and his dependants from unnecessary hardships that they would have been subjected to, as a result of a major loss or death.”

He said, “When you take insurance on your life, you are helping the society to prevent an increase of poor widows and orphans, who will become liabilities to the society, if anything happens to you.”

For this reason, he explained that the government encouraged a worker to do the right thing by granting him tax relief.

According to him, when the tax to be paid is being computed, the payer gets some concession, because the premium paid on insurance will not be taxed.

The Managing Director and Chief Executive Officer, Mutual Benefits Life Assurance Limited, a subsidiary of Mutual Benefits Assurance Plc, Mr. Femi Asenuga, said that life insurance policies would help a person to develop savings culture.

He said, “We are ensuring poverty eradication because a lot of children drop out of school when they lose their breadwinners, dependants go through unnecessary stress when they lose their parents.”

According to him, a person can have long-term or medium-term savings, and with time, he will have lots of money in his account which will be useful to him in future.

He added that life insurance policies guaranteed a person reduced tax deduction from his taxable income.

Asenuga noted that there were lots of customers who patronised life insurers, not just because of insurance benefits but because they could show evidence of paying life insurance policy to reduce their taxable income.

He said, “We have many customers from different sectors such as the oil and gas, telecoms, banking. For instance, if you are paying 10 per cent tax on your income, if the life insurance premium you are paying is five per cent, your tax pay will be reduced to five per cent according to the value of your policy. By this, you enjoy both life insurance benefits and tax deduction.”

The insurer explained that this practice was part of the tax requirement in Nigeria and also an international practice.

He added that all over the world, life insurance was tax deductive and that a lot of people from the corporate world patronised life policy for that reason.

source : Punch

  • Nwachukwu Marcel

    Very informative.