The Voluntary Pension Scheme in Pakistan is emerging as a transformative financial tool that offers flexibility, control, and long-term stability for employees. Unlike the traditional retirement saving plans such as provident or gratuity funds, VPS gives the power to customize investments, cater to unique financial needs, and optimize post-retirement lifestyle. Let’s get into the main advantages of opening a voluntary pension scheme in Pakistan and why this is an ideal choice for the future of Overseas Pakistanis.
1. Customizable Investment Options
The VPS is one such scheme that allows customizing the investment structure according to the risk profile and financial objectives of the employee.
- Younger employees: They can invest in high-risk, high-return portfolios, such as diversified stocks, to capitalize on long-term growth.
- Older employees: They can opt for conservative, low-risk options like government bonds for financial security closer to retirement.
Unlike provident funds, where all employees’ contributions are lumped together, VPS ensures that your investment strategy aligns with your individual needs.
2. Employer Contributions and Tax Benefits
In VPS companies, the employees still have access to employer-matching contributions, just like in provident funds. But VPS takes it a notch higher with major tax benefits:
- Employees can withdraw at least 50% of their accumulated funds tax-free when they reach the age of 60 or after 25 years of contributions.
- Contributions to VPS are deductible from taxable income, further reducing the tax burden during your working years.
- The government has also introduced parity in taxation rules in the 2020 budget bill, which makes withdrawals from VPS as tax-efficient as those from provident funds.
3. Long-Term Wealth Accumulation
Compound growth of funds in a VPS is a game-changer. When employers match your contributions, your savings grow exponentially. For example:
If you contribute Rs10,000 monthly and your employer matches it, you are effectively saving Rs20,000 monthly. This double contribution over time, through investment returns, creates a sizable retirement corpus.
This “free money” coming in from employer contributions, if properly invested, yields significant wealth to be enjoyed after retirement.
4. Flexible Withdrawal Rules
VPS counters one of the biggest disadvantages of provident funds: inflexible withdrawal rules. While provident fund withdrawals attract 100% tax unless repaid, VPS offers:
- With tax-free withdrawal of at least half the savings.
- The ability to retire at age 60 or on completion of contributions for at least 25 years, whichever happens first.
- The flexibility guarantees retirement savings stay accessible when the account holder desires without compromising their methodical financial planning.
5. Lowered Liability for Employer
This also helps employers reduce their liability. Under provident funds, companies legally bear any loss the employees, in pool investments, may have suffered. VPS takes over with professional asset management companies taking the responsibility off the employers’ heads.
The benefit extends to the employee also, as the power rests with his funds to determine any course of investment, irrespective of any employer discretion.
6. Contemporary Pension Scheme
The modernization of Pakistan’s pension framework has been toward global financial practice. VPS is a very new innovation, especially with newly recruited employees under the government scheme, which is far from outdated systems like gratuity and provident funds.
- Secure and stable source of retirement income: VPS ensures a regular inflow of post-retirement income.
- National implementation: With more than 43 pension funds managing Rs61 billion in investments, VPS has already gained popularity in the private and public sectors.
- Provincial governments like Khyber Pakhtunkhwa and Punjab have also initiated VPS reforms, indicating its increasing popularity and effectiveness.
7. Increased Financial Autonomy
VPS empowers the individual in that it is designed to afford him the capacity to manage his retirement savings successfully. Unlike a traditional system that allows employers or institutions to dictate management of funds, VPS lets participants:
- Determine their own asset managers
- Diversify investments according to life stages and financial objectives
- Build an assured financial future that is independent of government pensions
Final Thoughts
The voluntary pension scheme in Pakistan is a game-changer for Overseas Pakistanis, it empowers employees to have a financially sound future on their own terms. With benefits such as personalized investment options, tax advantages, and employer contributions, VPS offers the best of both worlds for retirement planning. Similarly, JS Bank offers a range of financial solutions tailored to meet diverse needs, including personal loans and innovative retirement planning products.
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