Frequently Asked Questions Voluntary Pension Schemes

What is a pension fund?


Voluntary Pension Scheme (VPS), a retirement scheme, is a pool of investment owned by investors and managed by a licensed Pension Fund Manager.

What is the objective of Pension Fund?


Pension Fund provides a regular source of income to maintain the living standard and meet health and other post retirement expenses. In addition, post retirement, regular income stream enables an individual to spend time relaxing with family, traveling, and pursuing other interests which were put aside earlier owing to busy work schedule. A Pension Fund can help Participants to accumulate the savings to achieve the financial security they desire after retirement.

What are NAFA Pension Funds?


NAFA Pension Funds are Voluntary Pension Schemes that facilitate savings for individuals for their retirement period. NAFA has two pension funds namely, NAFA Pension Fund and NAFA Islamic Pension Fund. The contributions received from the Participants are invested in the underlying sub-funds namely, equity, debt and money market based on the allocation option selected by the Participant according to his/her risk/return appetite. The Sub-Funds of NAFA Islamic Pension Fund invest only in Authorized Shariah Compliant avenues approved by the Shariah Advisor.

Who can join NAFA Pension Funds?


Following are eligible to join NAFA Pension Funds:

1. Pakistani Nationals holding valid National Tax Number (NTN) or Computerized National Identity Card (CNIC).
2. Non-resident Pakistanis holding NTN or CNIC or National Identity Card for Overseas Pakistanis (NICOP).

Note: following can also contribute in NAFA Pension Funds:

  • Employers can contribute on behalf of their employees.
  • A member of approved Provident Fund can transfer his / her balance to Pension Fund.

What are the benefits of NAFA Pension Funds?


Following are benefits for the Participants of NAFA Pension Funds:

1 Option of investing money as per the risk appetite of the Participant
NAFA Pension Funds allow the Participants to choose the allocation schemes according to their investment horizon, risk tolerance and return objective.

2 Tax Credit
The Participant are entitled to tax credit (20% of taxable income and upto 50% of previous year taxable income) on his/ her contribution. (See FAQ 15 for further details)

3. Tax free growth in investment
The Contributions made by the Participants and/ or their employers (if any), plus the investment income, are accumulated tax free in the Sub-Funds until the Participant retires.

4. Option to withdraw lump sum amount (50% of accumulated value) free of tax at retirement
A Participant can choose to receive a lump sum payment (up to 50% of his/her accumulated balance) when he/she retires, free of tax

5. Option to withdraw funds in case of early retirement due to disability
In case of unfortunate early retirement due to specified disability (see FAQ No. 27 for eligible list of disabilities) that render a participant unable to work, all benefits which otherwise are available on the retirement age becomes entitled, subject to approved medical evidence.

6. Pension Fund Continuity
NAFA Pension Funds continue even after change of employer unlike provident and gratuity funds. In other words the account stays in case of change in jobs by the Participants and they can continue to contribute on their own or through their new employer into their respective Individual Pension Accounts.

7. Pension Fund Portability
Participants of VPSs can change their Pension Fund Manager or the Pension Fund, once a year by giving 21 days prior notice. Further, participants can choose to change their selected Allocation Scheme, twice a year.

8. Professional management
NAFA Pension Funds are managed by professional fund management team of NBP Fullerton Asset Management Limited (NAFA) who has the the requisite knowledge and successful track record to manage such funds. NAFA is rated AM2+ as an Asset Manager by PACRA, which denotes High Investment Management Standards.

What is an Individual Pension Account?


Each Participant is required to open an Individual Pension Account. All contributions received from the Participant are credited to his/her Individual Pension Account.

Can a Participant have more than one Pension Account?


Yes, a Participant can have more than one Voluntary Pension Scheme accounts.

What is the minimum initial and subsequent amount that I can invest in NAFA Pension Funds?


A Participant can open an account with NAFA Pension Funds with minimum investment of Rs 10,000 and for subsequent contributions the minimum threshold is Rs 1,000.

What is the structure of NAFA Pension Funds?


Both NAFA Pension Fund and NAFA Islamic Pension Fund comprises of the following three sub-funds:

1. Equity Sub-Fund
The objective of the Equity sub-Fund is to achieve long term capital growth. The sub-Fund shall invest primarily in equity securities, with a minimum investment of 90% of its net asset value in listed shares.

2. Debt Sub-Fund
The objective of the Debt sub-Fund is to provide income along with capital preservation. The sub-Fund shall invest primarily in tradable debt securities with the maximum weighted average maturity of five years.

3. Money Markey Sub-Fund
The objective of the Money Market sub-Fund is to provide regular income along with capital preservation. The conventional Fund shall invest primarily in short term money market securities with the maximum average maturity of 90 days. Islamic Money Market sub-Fund’s average maturity can not exceed 1 year.

Who is the Trustee / Custodian of NAFA Pension Funds?


CDC is the Trustee and Custodian of NAFA Pension Funds.

What are the Allocation Schemes?


The choice of Allocation Scheme gives the Participant an opportunity of an individualized asset allocation according to his/ her risk/ return requirements and working life horizon. The risk-return profile of each Allocation Scheme is dependent on the allocation of that Allocation Scheme in the Sub-Funds.

The choice of Allocation Scheme gives the Participant an opportunity of an individualized asset allocation according to his/ her risk/ return requirements and working life horizon. The risk-return profile of each Allocation Scheme is dependent on the allocation of that Allocation Scheme in the Sub-Funds.
There are following five different Allocation Schemes available which the investor has to choose at the time of first investment, Once an allocation is determined by the participant/investor, all contribution of an individual are invested in the respective funds (Equity Sub Fund, Debt Sub Fund and Money Market Sub Fund) as per selected allocation:

Allocation Scheme Equity Sub-Fund Debt Sub-Fund Money Market Sub-Fund
High Volatility Min 65% Min 20% Nil
Medium Volatility Min 35% Min 40% Min 10%
Low Volatility Min 10% Min 60% Min 15%
Lower Volatility Nil Min 40% Min 40%
Customize Allocation 0%-100% 0%-100% 0%-100%
Life Cycle Allocation Starting with a higher equity investment allocation for an individual aged 18 years, the equity allocation is gradually reduced and transferred to Debt and Money Market Funds as an individual reaches the age of 60 years

*Depending on remaining working years and risk preference.

The Following table provides an Allocation of the ‘Life Cycle Allocation Scheme’ within each underlying Sub-funds:

 

Life Cycle Allocation

Plan Equity Sub-fund Debt
Sub-fund
Money Market
Sub-fund
18 – 30 years 75% 20% 5%
31 – 40 years 70% 25% 5%
41 – 50 years 60% 30% 10%
51- 60 years 50% 30% 20%
61 years and above Nil 50% 50%


What if the Participant does not choose any allocation scheme?


In the event of no selection of allocation scheme by the Participant, the Pension Fund Manager will allot the Life Cycle Allocation Scheme to that Participant.

Is change in Allocation Scheme allowed to the Participant?


Yes. A participant can change from one Allocation Scheme to another Allocation Scheme twice in a Financial Year.

What date can a Participant select as a retirement age?


Participant can choose his/her age of retirement between sixty and seventy years or after 25 years of joining VPS, whichever comes first. However, participant is required to submit thirty days prior notice to NBP Fullerton Asset Management Limited to redeem at the chosen date of retirement.

How much Tax Credit I can claim by investing in a Pension Fund?


In addition to a tax credit up to 20% of the taxable income, investor joining VPS at the age of 41 and above are entitled to an additional rebate (catch up) of 2% p.a. for each year of age exceeding 40 years. Thus, an individual joining VPS at the age of 50 can claim a tax credit of up to 40% of his/her taxable income. Similarly, an individual joining VPS at the age of 55 can claim a tax credit of Up to 50% of his/her annual taxable income.

Analysis of Catch up rebate as % of Taxable Income for investors joining VPS during FY 2014-2015

entitlement of tax credit as a % of taxable income

Join VPS at the age of
41 42 45 50 55*
2014-15 22% 24% 30% 40% 50%
2015-16 24% 26% 32% 42% 50%
* Entitlement is capped at 50% of the preceding year’s’ taxable income


Can Participant invest in both Mutual Funds and Pension Funds at the same time? If yes, is Participant entitled to tax credits for both type of investments?


Yes, one can concurrently invest in mutual funds and VPSs and avail tax credit facility under both forms of investments in the same year.

How tax credit can be claimed?


Salaried Participants can claim tax credit by simply providing account statement issued by Pension Fund Manager to their Human Resource Department with the request to reduce the tax liability accordingly. Self employed individuals can reduce their annual tax liability at the time of filing their annual income tax returns by the amount of eligible investment in their VPS.

Can a Participant continue to claim the investment allowance each year on the amount invested?


No, Participants can only avail tax credit for the tax year on investment made in that particular year in VPS.

Is the contribution made by the employers on behalf of his employees a tax admissible expense?


Yes, contributions made by the employer on behalf of the employees in NAFA Pension Fund and NAFA Islamic Pension Fund are a tax deductible expense as defined under clause 3(c) of the Definitions of the Income Tax Ordinance, 2001.

Can a Participant change the pension fund Manager and how frequently?


Yes, Participants can change the Pension Fund Manager once in a Financial Year by giving a notice of 21 days.

Can a Participant switch from NAFA Pension Fund to NAFA Islamic Pension Fund?


Yes, Participants can change the Pension Fund once in a Financial Year by giving a 21 days' notice.

Do the Pension Funds give dividend? (Cash/ Bonus Units). Can dividend in these funds be withdrawn by the Investor?


Income earned by the participant is accumulated in the participant's account and can be withdrawn any time. (subject to the provisions of Income Tax Ordinance 2001).

Is there any fee on transfer of accumulated balance from one Pension Fund Manager to another Pension Fund Manager?


No fee/load shall be charged on such transfers.

Can a Participant convert from existing mutual fund to VPS?


Yes, Participant can convert his/her mutual fund investment into VPS by redeeming the mutual fund investment and submitting third party letter in favor of NAFA Pension Fund.

Can a Participant transfer his/ her Provident Fund (PF) balance to VPS?


Yes, Participants can transfer his/her PF balance to VPS.

Can a Participant avail tax credit on amount transferred from PF to VPS?


Participant cannot claim tax credit on accumulated amount transferred from PF to VPS.

Which disabilities entitle an affected Participant to claim Retirement benefits before Retirement Age?


If a participant suffers from any of the following disabilities, which render him unable to continue any employment he may, if he so elects, be treated as having reached the retirement age at the date of such disability and all relevant provisions shall apply accordingly,
(a) loss of two or more limbs or loss of a hand and a foot;
(b) loss of eyesight;
(c) deafness in both ears;
(d) severe facial disfigurement;
(e) loss of speech;
(f) paraplegia or hemiplegia;
(g) lunacy;
(h) advance case of an incurable disease; or
(i) wounds, injuries or any other diseases, etc, resulting in a disability due to which the participant is unable to continue any work.
An assessment certificate from the medical board approved by the Commission will be required to confirm any of the disability specified in sub-rule.

What are the choices available to a Participant at retirement?


At retirement, a Participant can choose any one of the following:

A. Encash up to fifty per cent (50%) of the amount accumulated in his/her Individual Pension Account tax free and remaining 50% by paying tax as per Income Tax Ordinance 2001.
B. Utilize the entire balance amount at Retirement Age or balance remaining from point (A) above to choose one of the following :
    1 Purchase an Approved Annuity Plan from a Life Insurance Company of his/her choice; or
    2 Enter into an Income Payment Plan with Pension Fund Managers for monthly installments for fifteen years. After fifteen years he can buy another Income
       Payment Plan or an annuity.

What happens if a Participant wants to withdraw his/her accumulated amount before retirement age?


Participant may redeem all or partial units in his/her Account before attaining the retirement age. However, amount so redeemed shall be subject to deduction of Income Tax at his/her average tax rate for the last three years.
Average Rate of tax (for illustration purpose only) will be calculated as follows;

Tax Year Taxable Income  Tax Amount
1 1,200,000 63,500
2 2,400,000 245,000
3 3,600,000 500,000
Total 7,200,000 808,500

Average Rate = Total Tax amount of three years / Total taxable Income of three years
808,500/7,200,000 x 100 = 11.23%.

What happens in case of death of a Participant?


In the unfortunate event of the death of a Participant, the nominees as mentioned in the Nomination Form shall be entitled to the balance held in Individual Pension Account of the deceased Participant.

What are the options available to the Participant’s nominees in case of death of Participant?


The Nominee can avail the following options with his/her share of amount:

  • Withdraw his/her share subject to the conditions laid down in the Income Tax Ordinance; 2001 (XLIX of 2001);
  • Transfer it into his existing or new Individual Pension Account to be opened with the Pension Fund Manager, according to the Voluntary Pension System (VPS) Rules;
  • Use it to purchase an Approved Annuity Plan on his/her life from a Life Insurance Company, only if the age of the survivor is fifty five years or more; or
  • Use it to purchase a deferred Approved Annuity Plan on his/her life from a Life Insurance Company to commence at age fifty five years or later.