Easing your tax burden is one of the advantages of contributing to your retirement in a registered retirement benefits scheme. This is because as you contribute to your pension, you get to enjoy tax relief. What’s more, any investment income generated by these contributions is tax-exempt.
Does this mean that your benefits will be taxed once you exit a scheme? Let’s explore this.
In Kenya, contributors enjoy a maximum tax benefit of Kshs. 20,000 (minus NSSF contributions) per month or 30 percent of pensionable emoluments, whichever one is less.
For example, if you are a member of a registered retirement benefits scheme, earn Kshs 200,000 and contribute 7.5 percent of your salary every month and your employer contributes a similar amount, the figures will be as follows:
The administrator of the scheme will record these contributions in the following manner:
For this tax privilege, the first priority is given to your contribution, although employer contributions on behalf of employees are also tax deductible up to certain limits.
Usually, the limit is the portion out of the maximum which you have not exhausted.
Now let’s focus on the taxation of benefits upon your exit from a scheme. Benefits are paid out of a scheme on three occasions: if you withdraw from the scheme before retirement, on death before retirement, or on retirement.
At the point of exit, all non-tax-exempt contributions plus interest accrued are given to you free of tax whereas tax-exempt contributions plus interest are taxed.
Below we summarize how tax is applied in each of the three situations indicated above.
i. Taxation if you withdraw before retirement age
For all lump sum benefits payable at withdrawal, there is a tax-free amount of Kshs 60,000 for every year of membership of the scheme (subject to a maximum of Kshs 600,000).
However, there are two tax brackets on withdrawals as follows:
a. Early withdrawal before attaining 15 years in the scheme or retirement age:
b. Withdrawal after attaining 15 years in the scheme
From the above tables, it is clear that the earlier you withdraw from your scheme before retirement, the more tax you will have to pay.
For this reason, you are encouraged to leave your pension intact until retirement.
From the above tables, it is clear that the earlier you withdraw from your scheme before retirement, the more tax you will have to pay. For this reason, you are encouraged to leave your pension intact until retirement.
ii. Taxation on death before retirement age
The tax bands will be the same based on the status of the deceased at the time of death if the monies are being paid to the beneficiaries.
However, should the benefits be paid to the estate of the deceased member then there is an initial tax relief of Kshs 1.4 million and the balance is taxed based on the deceased member’s age and service at the time of death.
iii. Taxation on retirement
At retirement, lump-sum payments have tax relief of Kshs 60,000 per year of pensionable service, up to a maximum of Kshs 600,000.
For pensions secured at the point of retirement, the first Kshs 25,000 of monthly pension is free of tax.
The balance, in either case, is taxable in the following manner:
It is worth noting that the current regulatory framework stipulates that retirement benefits paid to individuals of age 65 years and above are tax-free.
In conclusion, knowing the tax status of your pension helps you plan for your financial future better.
It also aids in making certain decisions, for example, whether to withdraw your pension before retirement and the tax implications of doing so.
To read more about pension products, visit here.