Karachi Editors Club in collaboration with Suffa University organised an awareness session on Voluntary Pension System (VPS) and Retirement planning. All the speakers were unanimous that there is definite requirement to save money before retirement to secure future of family. President KEC emphasized that it is a fact that we are passing through deep financial crisis where saving become difficult but at the same time we have no other option. Prominent among speakers were Zeeshan of UBL Funds,Talha Anwar Country Head Al- Mezan Investment and Abid Rizvi HBL Asset Management. Chief Guest Sirajuddin Aziz Wafaqi Mohtsab Banking in his key note address narrated his personal experience how bankers can play positive role in motivating employees and clients to save money before retirement. He agreed that under high rate of inflation looks difficult but to secure future some saving has become the need of hour. Government of Pakistan has decided to rationalize pension as it is now being considered as major burden. At present Pakistan’s total federal pension allocation is approximately Rs 1.0 trillion. This surpasses the Federal Public Sector Development Program (PSDP). Roughly 66% to 70% of this federal amount goes towards retired armed forces personnel, while civilian pensions make up the remaining share. To control this fiscal burden, government introduced a contributory pension scheme for new federal civil employees and military recruits. Every scheme has two faces, I shall discuss its advantages and disadvantages and leave it to readers to decide about opting VPS. Voluntary Pension System (VPS) offered through banks or their associated asset-management companies, there are several important advantages and disadantages. The VPS itself is regulated by Securities and Exchange Commission of Pakistan (SECP), rather than being simply a bank deposit. SECP describes VPS as a tax-advantaged, self-contributory retirement scheme. Contributions to an approved VPS can qualify for a tax credit. SECP’s VPS guide states that the credit is based on the actual contribution or 20% of annual taxable income, whichever is lower, at the individual’s average tax rate. This can be particularly valuable for a person in a higher tax bracket. If your annual taxable income is Rs. 5 million, 20% is Rs. 1 million. A qualifying contribution of up to that amount can potentially generate a significant tax saving, subject to the applicable tax rules.The VPS invests contributions through different pension sub-funds. Depending on your risk profile, you can have exposure to equity, debt/fixed-income and money-market investments. This gives the possibility of long-term capital growth, rather than relying only on bank deposit rates.
For someone who starts VPS at 35-50 and continues contributing until retirement, investment returns can compound substantially. The longer the investment period, the more important this advantage becomes. You don’t necessarily have to contribute a fixed amount every month. Under the VPS rules, contributions can be made in a lump sum or instalments, and a person can contribute to one or more pension funds. This is useful for people whose income varies. The VPS creates an individual pension account for the participant. It is therefore a personal retirement asset rather than something dependent entirely on an employer’s pension scheme. VPS is not restricted to government employees or people working for large companies. Eligible individuals can contribute themselves, and employers can also contribute in appropriate arrangements. An important advantage over an informal investment arrangement is that VPS operates under the SECP’s regulatory framework. The rules cover investment policies, participant rights, disclosures, fees, redemption, transfer between pension fund managers and taxation. The rules provide for transferring an individual pension account from one Pension Fund Manager to another. This gives you some flexibility if you are dissatisfied with performance or service. VPS is not equivalent to a bank fixed deposit. A bank may market VPS through its branch network, but the underlying VPS is an investment-based pension product, not a guaranteed-return deposit. Your return depends on the performance of the underlying investments. For someone already retired or aged 60+, the calculation becomes very different. The tax advantage may be less useful, while investment risk and withdrawal/tax treatment become more important.If you are considering putting a substantial amount-for example Rs. 5 million, Rs. 10 million or Rs. 20 million-into a bank’s VPS, I would first compare it with VPS vs National Savings vs bank term deposit vs money-market mutual fund vs income fund.The comparison should include expected return, tax, safety of principal, liquidity, fees and how much monthly income you can actually draw.
Let us see what are the disadvantages. Unlike a guaranteed pension, the value of your VPS depends on investments in equity, debt, money-market and other funds. Poor market performance can reduce your retirement savings. The final amount available at retirement is not fixed. It depends on how much you contribute, investment returns, charges and the length of time you remain invested. Even if your fund grows, inflation can reduce the real purchasing power of your retirement savings. Fund management, administration and other applicable charges can reduce your overall returns, particularly over a long period. VPS is designed for retirement. Taking money out before retirement may result in tax consequences and can substantially reduce the amount available later. The investor generally has to choose an appropriate risk profile. An overly conservative choice may produce inadequate growth, while an aggressive choice can expose retirement savings to substantial market fluctuations. During periods of high inflation, economic instability or weak financial markets, the investment return may not keep pace with inflation. Even a sizeable retirement fund can eventually run out if withdrawals are too high or the retiree lives much longer than expected. Unlike an employer-funded pension where contributions may be automatic, VPS depends heavily on the individual maintaining regular contributions over many years. The tax treatment of contributions, withdrawals and retirement benefits is important and can change with government policy. Therefore, the advertised tax advantage should not be considered permanent.The most important point.VPS is not necessarily bad; its biggest disadvantage is that it transfers much of the responsibility and investment risk from the employer/government to the individual. It can be useful for someone who has no traditional pension, but before investing, one should compare the VPS with alternatives such as provident fund, gratuity, government pension (where applicable), National Savings and other retirement investments.VPS whether it is worthwhile for a retired person or someone aged 50-60, including the tax benefits, withdrawal rules and risks under the current 2026 rules.
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