Across Lagos, many retirees are raising concerns that monthly pensions of between ₦30,000 and ₦50,000 are no longer enough to keep up with rising food, rent and medical costs.
To examine the factors that can contribute to inadequate retirement income,The HR Anchor spoke with Onifade Damilola Elijah, Managing Partner at Bold Alliance Consult. He is a Chartered Accountant with over a decade of professional experience, and holds an HND, BSc, MBA in Finance, ACA and ACTI certifications.
In this Interview, Mr. Onifade breaks down how PAYE tax and pension contributions work across states and federal level, why delayed remittances and low salary bases shrink retirement payouts, and what both government and workers can do to avoid “pension poverty.”
He also explains how the new 2026 tax reforms affect take-home pay, whether Lagos should index pensions to inflation, and what role PFAs play in growing the money workers set aside for retirement.
How exactly does PAYE tax and pension contributions from a worker’s salary in Lagos connect? Why should a taxpayer care about pension?
PAYE means Pay As You Earn. It is the system through which income tax is deducted from an employee’s taxable employment income by the employer and remitted to the relevant tax authority.
PAYE and pension are two different deductions with different purposes.
PAYE is a tax paid to the government, while pension contributions are retirement savings paid into the employee’s RSA and invested for the employee’s future benefit.
The important connection is that pension contributions can have an effect on the determination of taxable income under the applicable tax rules.
Therefore, pension should not be viewed simply as money being deducted from an employee’s salary. It is a form of long-term financial security designed to provide income after retirement.
Retirees are saying their monthly pension is ₦30,000–₦50,000. From a tax and accounting view, what are the 3 main reasons the payout is this small? Is it low salary base, poor remittance, or inflation?
The three factors can all contribute to a low retirement benefit.
First, low salary and contribution levels: Since pension contributions are based on the employee’s pensionable earnings, a lower salary generally results in lower contributions and therefore a smaller retirement fund.
Second, delayed or incomplete remittance: If contributions deducted from an employee’s salary are not remitted promptly, the funds may not be invested when they should be. This can result in lost investment returns and reduce the eventual retirement balance.
Third, inflation and investment performance: Even where a pension fund grows in nominal terms, high inflation can reduce its real purchasing power. Therefore, investment returns need to be considered in real terms, after taking inflation into account.
So, it would be incorrect to say that pension is strictly determined by salary alone. The final retirement benefit depends on the amount contributed, length of contribution, remittance, investment performance, inflation and the applicable retirement benefit structure.
If a Lagos civil servant earns ₦200,000, how much goes to tax, how much goes to pension 8% + 10%, and how is that eventually calculated into monthly pension? Where does the system break?
Assuming the employee’s relevant monthly pensionable emolument is ₦200,000 and ₦500,000 annual rent.
Pension contribution
Employee contribution:
8% × ₦200,000 = ₦16,000 per month
Employer contribution:
10% × ₦200,000 = ₦20,000 per month
Total monthly pension contribution:
₦16,000 + ₦20,000 = ₦36,000
Therefore, the employee does not personally bear the entire 18%. The employee contributes 8%, while the employer contributes 10%, subject to the applicable pension rules.
The PAYE calculation
ANNUAL MONTHLY
Gross Income ₦2,400,000 ₦200,000
Pension 8% ₦192,000 ₦16,000
NHF 2.5% ₦60,000 ₦5,000
Rent Relief 20% ₦100,000 ₦8,333.33
500,000
PAYE ₦307,200 ₦25,600
How is this calculated? (2026 Tax Reforms)
Step 1: Check Tax-Free Threshold
If you earn ₦800,000 or less per year, you pay zero income tax. This provides breathing room for low-income earners.
Step 2: Calculate Deductions (Fully Deductible)
• Rent Relief: 20% of annual rent ₦500,000 = ₦100,000
• Pension: 8% of gross income = ₦192,000
• NHF: 2.5% of gross (if monthly income > ₦3,000) = ₦60,000
Step 3: Calculate Taxable Income
Gross Income: ₦2,400,000
Total Relief: -₦352,000
Taxable Income: ₦2,048,000
Step 4: Apply Tax Brackets (Progressive)
• First ₦800,000: 0% (tax-free)
• ₦800,000 – ₦3,000,000 @ 15% – ₦2,048,000 = ₦307,200
• ₦3,000,000 – ₦12,000,000 @ 18%
• ₦12,000,000 – ₦25,000,000 @ 21%
• ₦25,000,000 – ₦50,000,000 @ 23%
• Above ₦50,000,000 @ 25%
The system can break down where there is low contribution, delayed remittance, inadequate pension coverage, poor investment performance, high inflation or a relatively short contribution period.
How does delayed pension/tax remittance directly reduce what a retiree gets 20 years later?
Delayed pension remittance can affect the eventual retirement benefit.
Under the Pension Reform Act framework, employers are required to remit pension contributions within the prescribed period. Where contributions are delayed, the funds may not be invested promptly.
This creates an opportunity cost because the money could have generated investment returns during the period of delay.
For example, if ₦100,000 should have been invested today but is not remitted for several months, the employee loses not only the opportunity to earn returns on the ₦100,000 but potentially the future returns that those returns could have generated.
PAYE is different because it is a tax liability. Delayed PAYE remittance primarily creates tax compliance, interest and penalty consequences for the employer rather than directly increasing the employee’s pension balance.
Prices have tripled but pensions are static. Should Lagos index pensions to inflation? Does low taxable income mean the entire pension pool will always be small?
Inflation is an important consideration in pension policy because a pension that does not increase while the cost of living rises will lose purchasing power.
Therefore, from a policy perspective, there is a strong argument for mechanisms that protect retirees against inflation. However, any pension adjustment must be supported by sustainable funding and actuarial analysis so that it does not create an unsustainable burden on the government.
Also, low taxable income does not automatically mean low pension contributions because PAYE and pension are separate systems.
However, where workers have low pensionable earnings or a large proportion of the workforce is outside the formal pension system, the overall contribution pool can be smaller.
Therefore, pension outcomes depend not only on tax but also on employment levels, salary levels, pension coverage, contribution rates, investment returns and inflation.
Are PFAs investing pension contributions properly, or can poor investment returns cause retirees to receive small pensions?
Pension contributions are not simply tax-deducted money. They are retirement savings contributed by employees and employers and paid into the employee’s RSA.
PFAs are responsible for managing and investing pension assets in accordance with applicable regulations and approved investment limits.
The funds may be invested in permitted instruments such as government securities, corporate bonds, equities and money-market instruments.
Investment performance is therefore an important factor in determining the eventual size of an employee’s retirement fund.
However, a low retirement benefit cannot automatically be blamed on PFAs. We should also consider:
The amount contributed;
The length of the contribution period;
Whether contributions were remitted promptly;
Investment performance;
Inflation; and
Applicable fees and retirement benefit arrangements.
The key measure should be the real return after inflation, rather than looking only at the nominal investment return.
If you were advising Lagos State Government today, what two things can they do with tax policy and pension policy to improve retiree payouts without collapsing the state budget?
I would recommend targeted tax incentives that encourage additional retirement savings rather than a broad PAYE reduction.
A blanket tax reduction could reduce government revenue, while targeted incentives for retirement savings can encourage workers to build larger retirement funds without creating an excessive fiscal burden.
Pension policy
The government should focus on improving pension governance, ensuring timely remittance and working with the relevant pension authorities and PFAs to achieve competitive investment performance and greater transparency.
The objective should be to ensure that pension assets generate strong real returns after inflation and applicable charges.
In simple terms, the government should try to increase the size and purchasing power of the retirement fund rather than relying entirely on higher government expenditure after retirement.
For a Lagos worker paying PAYE and pension now, what should they do to avoid “pension poverty”?
My candid advice is: do not wait until retirement before planning for retirement.
A worker should:
Maintain their mandatory pension contributions.
Consider Additional Voluntary Contributions (AVC) where affordable and appropriate.
Build an emergency fund outside the pension account.
Consider diversified and regulated investments for additional long-term savings.
Regularly check their pension contributions and RSA balance to ensure contributions are being properly remitted.
Review their retirement savings against inflation and their expected retirement needs.The objective should be to have multiple layers of financial security.
