Question Tag: Defined Contribution

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  • 5 Marks

PT – Nov 2023 – L2 – Q2d – Income Tax Liabilities

Explanation of defined benefit and defined contribution schemes in the Ghanaian context.

Explain the following:
i) Defined benefit scheme
ii) Defined contribution scheme
(5 marks)

i) Defined benefit scheme:
Defined benefit scheme refers to a pension scheme where the employee, upon retirement, receives a pension amount based on the length of service and salary, often calculated using the final salary or an average of the last few years’ salaries. The pension amount is predetermined, and the risk is borne by the employer.

ii) Defined contribution scheme:
A defined contribution scheme is a pension plan where the employer commits to making annual contributions, typically a certain percentage of the employee’s salary, into a retirement account. The funds are invested, and upon retirement, the pension amount is derived from the accumulated contributions and the returns on those investments. Unlike the defined benefit scheme, the investment risk is borne by the employee.
(5 marks)

  • 5 Marks

PT – Nov 2021 – L2 – Q2e – Tax Administration

Distinguish between defined benefit schemes and defined contribution schemes.

Distinguish between defined benefit schemes and defined contribution schemes.

Defined Benefit Schemes
A defined benefit scheme provides a clear and definite pension benefit upon retirement. The benefits are usually calculated based on the length of service and final salary or an average of the last few years’ salaries. In Ghana, the Basic National Social Security Scheme is a defined benefit scheme, managed by SSNIT, where participation is mandatory for public and private sector workers.

Defined Contribution Schemes
A defined contribution scheme involves contributions made by the employer and/or the employee. The contributions are invested, and the employee receives pension benefits based on the accumulated contributions and returns on the investments. The benefits are not fixed and depend on the performance of the investments. In Ghana, Tier 2 and Tier 3 pension schemes are defined contribution schemes, where contributions are managed by privately licensed providers.

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