How to do Calculation of Pension and Gratuity in Nigeria

In this post, we will show you how to do calculation of pension in Nigeria. After retirement from service, retirees’ are entitled to withdraw money from their retirement savings account (pension scheme). However, the employer, out of the goodness of the heart may decide to voluntarily include some other kind of severance packages (e.g. gratuity) alongside the already compulsory retirement benefits payment.

If you’ve been wanting to know how to calculate your pension contribution, the amount of gratuity you’re expected to receive and get to know how pension and gratuity work in Nigeria then read on till the very end.

Understanding Pension

Pension is a scheme that is conceptualized on ensuring that workers after many years of service get to enjoy the later part of their lives without having to worry about any financial issues despite not been able to get the normal monthly salaries and entitlements they are used to.

Presently, workers are expected to contribute 8% of their salary to their pension contribution scheme while the employer is expected to contribute 10% of the worker’s salary but it’s possible for the worker to contribute more than 8% which is optional.

See Also: 9 Functions of the National Pension Commission (PENCOM)

How to Calculate Pension in Nigeria

The Pension Reform Act 2004 initiated the Nigeria Pension Commission also known as PenCom, a body that was set up to control, oversee and guarantee that there is effectual management of pension funds to ensure that retirees’ in Nigeria do not suffer the injustice that has been occurring in the past as regards the payment of pension funds.

According to the PenCom guidelines, in a pension scheme, the worker is expected to contribute a quota of 8% from the sum of his basic salary, housing allowance, and transport allowance (not necessarily from the entire salary as previously thought to be), while the employer is expected to contribute 10% which is calculated in the same vein as that of the worker. A formula that could be used when calculating the actual amount the worker (employee) and the employer pays is:

Total employee’s pension contribution (8%) = (Basic Salary + Housing Allowance + Transport Allowance) ×

Total employer’s pension contribution (10%) = (Basic Salary + Housing Allowance + Transport Allowance) ×

Total sum of the pension contribution (18%) = Total employee’s pension contribution (8%) + Total employer’s pension contribution (10%).

Workers can only access the fund in their retirement savings account upon retirement but there are some exceptions and grounds that can permit withdrawals from the retirement savings account even before the retirement period. An example of such an instance is when the worker is out of employment for over 4 months.

See Also: Life after Retirement in Nigeria: Shocking Revelations and What you may Likely Experience when you retire

Understanding Gratuity Benefits

Gratuity benefit is a large sum of money (made in a single payment) that an employer can use as a reward to a worker for a commendable and extensive service over the years for the organization or establishment at the time of their retirement.

Employers are not mandated to pay their workers gratuity benefits, but can, however, out of the goodness of their heart, decide to set up a gratuity scheme for the employees in addition to the obligatory pension contribution scheme.

The gratuity amount and time which the employee can access the amount is dependent on various factors including the length of service and is usually subjected to terms and conditions of employment. In the previous decades, it was not hard to find companies and establishments that are willing to pay a huge amount of money in form of gratuities to their workers who are retiring.

But nowadays, it seems it is only the government (at the local, state, and federal level) that are paying any form of gratuities (even though it’s small) to their workers upon retirement.

Even now, most companies and establishments are hesitant in remitting their employer’s pension contribution to the retirement savings account of their workers as mandated in the Pension Reform Act 2004.

See Also: Pension in Nigeria; Overview, Management, Regulations, Problems, And Prospects

How Gratuity Benefits are Being Calculated in Nigeria

The gratuity amount and time which the employee can access the amount is dependent on various factors including the length of service and is usually subjected to terms and conditions of employment. It can be calculated by using this formula:

Gratuity Amount = (Basic salary + Dearness Allowance) × number of years used in service ×

Based on the use of this formula, a time that is over six months or more is considered to be approximately a year. This means that if Mr. A has worked at XYZ Nigeria Limited, for about ten years and six months, the total number of years that would be taken into consideration while calculating the gratuity benefits amount that Mr. A gets would be eleven years.

The same is applicable, if Mr. B worked with XYZ Nigeria Limited for nine years and four months, the total number of years that would be taken into consideration while calculating the gratuity benefits amount that Mr. B gets would be nine years.

See Also: Top 10 Pension Administrators In Nigeria


In the past, pension schemes in Nigeria had been filled with a lot of problems and misconduct towards workers and public servants, but after the passing of the Pension Reform Act in 2004, it has become a new story entirely. Retirement shouldn’t be a period characterized by idleness or financial hardship as it is in most cases with workers in Nigeria, it should be a time where you get to rest from work, pursue your dreams and live an independent life.

You should have a plan to save for your retirement and the kind of lifestyle you want to live in your post-retirement period. You should also avoid making the mistake of putting all your eggs in your retirement account and be open to diversifying your savings by having investments and businesses that would serve as a backup plan for your Pension scheme.

However, note that investment can be a risk, and you should be cautious and strategic about how you invest your money to avoid losing it all. If you want the calculation of your pension and gratuity benefits done for you, it can be worthwhile to check out various gratuity and pension calculators online.

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Ayobamidele Livingson

Ayobamidele Livingson is a content developer at InfoGuide Nigeria team comprises Resource Persons and Consultants led by Ifiokobong Ibanga. Page maintained by Ifiokobong Ibanga. If you need a personal assistance on this topic, kindly contact us.

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