Your pension as tax shield: How the new tax law affects your pension contributions

For many Nigerian employees, pension contributions appear on their monthly payslip as a routine statutory deduction. The figure is deducted automatically, transferred into a Retirement Savings Account (RSA), and often forgotten until retirement planning becomes urgent. Yet beyond being a compulsory savings mechanism, the pension system in Nigeria is deliberately structured to provide clear and powerful tax advantages.

That structure has helped build one of the largest pools of long-term capital in the country. As at 2025, the total pension assets under management had grown to approximately N27.45 trillion, reflecting consistent contributions, disciplined investment and decades of compounded growth within a tax-protected framework.

Understanding how pension contributions are treated for tax purposes helps explain not only individual benefits, but also how the industry has reached this scale.

Under the Pension Reform Act (PRA), employees in the formal sector are required to contribute a minimum of 8 percent of their basic salary, housing and transport allowances into an RSA, while employers contribute at least 10 percent. These contributions are remitted monthly to a licensed Pension Fund Administrator.

The first layer of tax advantage lies in how these contributions are deducted. Pension contributions are taken before Pay-As-You-Earn income tax is calculated. This means that the amount contributed is excluded from taxable income.

Consider the case of Chinedu, who began working at age 25. If his monthly qualifying income was N400,000 and N32,000 went into his pension account, his tax was calculated on N368,000 rather than N400,000. From his very first payslip, a portion of his income was shielded from immediate taxation. At the time, the deduction felt automatic. But over time, the reduction in taxable income translated into measurable tax savings. When computed over a decade, the impact became even more meaningful.

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When Chinedu received promotions and salary increases, he decided to take advantage of ‘Additional Voluntary Contributions (AVC)’. Instead of allowing his entire pay raise to be taxed and absorbed into expenses, he redirected part of it into his RSA. Like his mandatory contribution, the voluntary amount was treated within the same tax framework, reducing his taxable income at the point of contribution.

Meanwhile, his employer’s 10 percent contribution flowed into his account without being treated as taxable income in his hands. Although it formed part of his overall compensation package, it did not increase his personal income tax liability. Over time, this employer-funded portion became a substantial component of his retirement balance.

As the funds accumulated, they were invested across approved asset classes, including government securities, corporate bonds and equities. Each year, returns were credited to his account. Crucially, those returns were also not subjected to annual personal income tax while they remained within the pension system.

This tax-exempt accumulation is one of the most powerful features of the framework. Compounding works best when returns are reinvested in full. By preventing annual tax erosion of investment gains, the pension structure allows contributors to benefit from uninterrupted long-term growth.

Three decades later, when Chinedu approached retirement, his RSA reflected his mandatory contributions, voluntary contributions, employer contributions and years of compounded returns. Throughout his working life, the system had reduced his taxable income annually, protected his investment growth from annual personal taxation, and ensured that the employer contributions did not increase his tax burden.

When he eventually began accessing his retirement benefits in accordance with regulatory guidelines, the payments were made without additional income tax. The funds he had accumulated from his twenties to his late fifties were not subjected to fresh personal income taxation at the point of retirement.

But the pension tax advantage is not limited to salaried workers.

Aisha, a self-employed architect in her early thirties, operates outside formal employment. She does not have an employer deducting pension contributions on her behalf. Through the Personal Pension Plan (PPP) established under the same Pension Reform Act, she opened a RSA with a licensed PFA and began contributing directly from her business income.

Like the CPS for employees, her contributions entered the same tax-protected structure. The amounts she set aside were treated as pension contributions within the regulatory framework, rather than remaining fully exposed as ordinary income. The funds were invested under the same guidelines, and the returns accumulated within her account without annual personal income tax deductions.

Years later, when she retires, her benefits will be accessed under the same tax-efficient structure as salaried contributors. The PPP ensures that entrepreneurs, freelancers and professionals outside structured employment can participate in the same system of tax-protected retirement savings.

It is important, however, to distinguish between contributors and the institutions managing their funds. While contributors benefit from tax advantages on their retirement savings, PFAs themselves operate as corporate entities subject to company income tax and other statutory obligations on the fees they earn. The tax protection applies to the pension assets within Retirement Savings Accounts, not to the business income of the administrators.

The growth of pension assets to N27.45 trillion by 2025 demonstrates the scale of this framework in action. Behind that figure are over 11 million contributors: salaried employees and self-employed professionals alike, whose savings have accumulated within a system designed to reduce taxable income at the point of contribution, allow tax-efficient investment growth and provide tax-exempt benefits at retirement.

For young workers reviewing their first payslip, pension deductions may seem like a distant obligation. For entrepreneurs managing fluctuating income, setting aside funds for retirement may feel secondary to immediate business pressures. Yet, from the first contribution to final benefit payment, the pension structure operates as both a retirement plan and a deliberate tax shield.

It quietly protects a portion of your income from immediate taxation, preserves investment returns within a regulated framework, and ensures that retirement savings can be accessed without extra personal income tax. With the new tax law, your contributions are even more impactful helping you grow your pension while supporting a multi-trillion-naira industry and securing the financial future of millions of Nigerians.