VPS is a pension account you open yourself with a fund company. You put money in whenever you like, it is invested for you, and it grows without tax until you retire. If you are salaried or run a business, the government also cuts your income tax for every rupee you put in, up to a limit. At retirement you can take half of it as tax-free cash.
That is the whole idea. The rest of this guide is the detail: how much tax it really saves, when you can touch the money, and when it is not worth it.
What Is VPS in Pakistan?
The Voluntary Pension System was set up under the SECP’s Voluntary Pension System Rules 2005. Anyone over 18 with a CNIC or NICOP can open an account, so overseas Pakistanis can join too. Your employer can also pay into it for you.
The accounts are run by pension fund managers: asset management companies and life insurers licensed by the SECP. By March 2026, 19 managers ran 66 pension funds holding about Rs 138 billion, according to SECP figures in the Pakistan Economic Survey. That count includes government employees’ pension funds, so fewer are open to you.
How Is Your VPS Money Invested?
Every pension fund has at least three parts, called sub-funds: an equity sub-fund (shares), a debt sub-fund (bonds and sukuk) and a money market sub-fund (very short-term, low-risk lending). When you open the account, you choose an allocation, which is the mix between them. A young person might pick mostly equity for growth, and someone close to retirement mostly money market for safety. The fund rebalances your mix once a year.
Returns are not fixed. They depend on how the shares and bonds in your mix perform. Each fund publishes a monthly fund manager report with its past returns.
How Much Tax Does VPS Save?
This is the part most people get wrong. Under section 63 of the Income Tax Ordinance, you get a tax credit on what you put into a VPS. The credit is your average tax rate multiplied by your contribution, and only contributions up to 20% of your taxable income count.
Your average tax rate is your total tax divided by your taxable income. That is why the saving depends so much on your salary. Here is what it looks like under the 2026-27 slabs:
| Monthly salary | You put in each month | Tax saved in a year |
|---|---|---|
| Rs 100,000 | Rs 10,000 | Rs 600 |
| Rs 200,000 | Rs 20,000 | Rs 15,600 |
| Rs 200,000 | Rs 40,000 (the 20% limit) | Rs 31,200 |
| Rs 300,000 | Rs 60,000 (the 20% limit) | Rs 83,200 |
On a Rs 100,000 salary, your whole year’s tax is only Rs 6,000, so there is very little to save. The tax credit starts to matter from around Rs 200,000 a month, and it matters a lot for higher salaries. The credit only applies against tax on salary or business income.
Use the calculator below with your own numbers.
Putting Rs 20,000 a month into a VPS cuts your tax by about Rs 15,600 this year, so it really costs you Rs 224,400.
- You pay 93.5%
- Tax saved 6.5%
Your pension account over time
| When | You put in | Estimated value |
|---|---|---|
| Age 35 | Rs 1,200,000 | Rs 1,649,727 |
| Age 40 | Rs 2,400,000 | Rs 4,646,782 |
| Age 45 | Rs 3,600,000 | Rs 10,091,520 |
| Age 50 | Rs 4,800,000 | Rs 19,982,958 |
| Age 55 | Rs 6,000,000 | Rs 37,952,702 |
| Age 60 | Rs 7,200,000 | Rs 70,598,275 |
Source: Income Tax Ordinance 2001, section 63 and Second Schedule clause (23A); Finance Act 2026 slabs
Your money grows tax-free
Approved pension funds do not pay tax on their own income, so profits and dividends inside your account are not taxed year by year. Over 20 or 30 years, that adds up.
When Can You Withdraw From VPS?
At retirement. You choose a retirement age between 60 and 70, or you can retire 25 years after your first contribution, whichever comes first. At retirement you can take up to 50% of your balance as cash, and that cash is tax-free.
The other half has to give you an income. You either buy an annuity from a life insurance company, which pays you every month for life, or keep it with the fund in an income payment plan, which pays monthly instalments for up to 15 years. When that plan ends, you can buy an annuity, start another plan or withdraw what is left.
Before retirement. You can withdraw at any time, but the amount is taxed at your average tax rate over the last three years. In practice, that takes back the tax saving you got, so VPS only works as long-term money.
Disability and death. If you become disabled, a medical board certificate lets you retire early. If you die, the balance goes to the nominees you named, in the shares you set.
Can You Change Your VPS Fund or Provider?
You can move your whole account to another pension fund manager once every financial year, with 21 days’ notice, and the move itself is free. You can also switch between funds. This matters, because fees and returns differ between managers.
What Does a VPS Account Cost?
The VPS Rules cap the management fee at 1.5% of your balance a year and any front-end fee at 3% of each contribution. Many funds charge less. Check the fee in the fund’s offering document before you open an account.
When Is VPS Not Worth It?
- Your salary is low enough that your tax is small. The credit cannot be more than the tax you pay.
- You might need the money in the next few years. Early withdrawal is taxed.
- You do not have savings for emergencies yet. Build those first, in an account you can reach.
Common questions
Is VPS the same as a mutual fund?
It is run by the same kind of company and invests in similar things, but it is locked for retirement and comes with the tax credit. A mutual fund can be sold any time, with no credit.
Can freelancers use VPS?
Anyone can open an account. The section 63 tax credit applies to tax on salary or business income, so check how your income is taxed before counting on the saving.
Is there a Shariah-compliant VPS?
Yes. The VPS Rules allow Shariah-compliant pension funds, and several run under them, for example Al Meezan’s Meezan Tahaffuz Pension Fund. Ask the pension fund manager you choose whether it offers an Islamic option, and read its offering document for the sub-funds and fees.
Sources
The tax rules are in the Income Tax Ordinance 2001 (FBR’s text, amended to February 2026): section 63 for the credit, section 12(6) for early withdrawals and the Second Schedule for the tax-free cash and the fund’s exemption. The account rules are in the SECP’s Voluntary Pension System Rules 2005, rules 11 to 20. Fund industry figures are from the Pakistan Economic Survey 2025-26, which cites the SECP. The 25-year retirement option was confirmed in an SECP press release.
Related
See your full tax with and without a VPS in the salary tax calculator.