You Need 66% To 85% Of Your Income To Sustain You During Retirement

By Cytonn Investments / August 10, 2020 | 9:41 am



daily interest investment

If you have thought about your retirement, then chances are you have considered saving in a pension scheme or you already are a member of one.

Pension schemes allow individuals to make regular contributions during their productive years into these schemes and thereafter get retirement income from the schemes upon retirement.

Pension Schemes also serve to provide assistance to beneficiaries of the contributing individual upon their death.

We have on various occasions highlighted the benefits of saving in a pension scheme including but not limited to:

To be able to live the lifestyle you desire even after retirement – Saving for retirement is like putting money aside for the desired vacation trip; the only difference is that retirement ages lasts longer and so should your saving period,

The power of compounding – Your interest grows interested. Your money can grow  faster because earnings that could have been taxed get reinvested and earn even more,

Tax benefits – Your contributions reduce your taxable income. Your income is taxed after your contribution to a retirement scheme has been deducted. In Kenya, pension scheme members enjoy tax relief on contributions of Kshs 20,000 monthly or 30% of their salary when contributing

Old age dependency – To avoid being a burden on your children/relatives when old

The above said regular contributions are encouraged from an early age in order for you to enjoy a comfortable retirement.

The general consensus among financial experts is that you need about 66% to 85% of your income before retirement in order to sustain the same standard of living in retirement.

Prudent retirement planning practice discourages any sort of withdrawal before the attainment of the retirement age, as illustrated in our previous article here.

However, at the end of day accessibility to pensions is one of the key considerations before joining a pension scheme. There are two main ways through which a pension scheme member may access their savings, namely:

Early Leaving, and

Retirement

Early Leaving

For a member that opt to leave a scheme early before attaining the retirement age, they have the following options:

Transfer – to transfer their savings to another registered retirement benefits scheme.

Deferral – to leave their savings in the scheme as a Deferred Member’s Account which the member may access on or after the age of fifty.

Withdrawal – A member may withdraw from the scheme in lump sum an amount not exceeding their portion of savings plus 50% of the employer’s portion. The remaining 50% will be retained in the scheme until the member retires, opts to transfer the benefits to another registered retirement benefits scheme, or emigrates to another country with no present intentions of returning to reside in Kenya.

Emigration – a member who has emigrated from Kenya and has no intention of returning to reside in Kenya can access all of their savings including the whole of the employer portion.

A withdrawal before retirement you are entitled to receive tax-free lump sum payment from the scheme of Kshs. 60,000 for every full year of membership in the scheme up to a maximum of Kshs. 600,000. The excess amount is taxed as per the bands below:

Retirement

Retirement is the other way one can access pension benefits.

Retirement is when you withdraw yourself from active working life.

There are two types of Retirement schemes based on payment at retirement:

Pension Scheme (Lump sum + Periodic Income)

At retirement, a member of a pension scheme may access up to a third of their contributions and contributions made on their behalf plus accrued interest as a lump sum. The remainder is used to purchase an annuity (pension) that pays a periodic income to the pensioner in their retirement years, usually, monthly or may be transferred to an income drawdown fund

Provident Fund (Lump sum)

At retirement, a member of a provident fund receives their contribution and contributions made on their behalf plus accrued interest as a lump sum

Taxation at Retirement

  • Taxation applies in both cases regardless of which way one accesses their pension savings.
  • On retirement before 65yrs, the annual tax-free pension is Kshs. 300,000 (Kshs 25,000 per month).
  • For lump-sum payments at retirement, the first Kshs. 600,000 lump sum commuted from a registered retirement scheme.
  • Pensions and lump sum payments after age 65 are tax-free.

The excess amounts are taxed in the same manner as if one had to be in a scheme for over 15 years as shown in the table above.

The favorable taxation regulations applied when contributing and when accessing the pension savings is a huge incentive for Kenyans to save in pension schemes.

Lastly, we caution that the tax bands for a member who has been in a scheme for less than 10 years are narrower eroding, and as such most of the tax relief that was enjoyed when contributing.

We, therefore, recommend that it is best to not access your pension savings regularly but retain the most in a pension scheme as you stand to build on your pension savings whilst benefitting from compounded interest.







More Articles From This Author







Trending Stories










Other Related Articles










SOKO DIRECTORY & FINANCIAL GUIDE



ARCHIVES

2020
  • January 2020 (272)
  • February 2020 (310)
  • March 2020 (390)
  • April 2020 (321)
  • May 2020 (335)
  • June 2020 (327)
  • July 2020 (334)
  • August 2020 (276)
  • September 2020 (184)
  • 2019
  • January 2019 (253)
  • February 2019 (216)
  • March 2019 (285)
  • April 2019 (254)
  • May 2019 (272)
  • June 2019 (251)
  • July 2019 (338)
  • August 2019 (293)
  • September 2019 (306)
  • October 2019 (313)
  • November 2019 (362)
  • December 2019 (319)
  • 2018
  • January 2018 (291)
  • February 2018 (213)
  • March 2018 (278)
  • April 2018 (225)
  • May 2018 (238)
  • June 2018 (178)
  • July 2018 (256)
  • August 2018 (249)
  • September 2018 (256)
  • October 2018 (287)
  • November 2018 (284)
  • December 2018 (185)
  • 2017
  • January 2017 (183)
  • February 2017 (194)
  • March 2017 (207)
  • April 2017 (104)
  • May 2017 (169)
  • June 2017 (205)
  • July 2017 (190)
  • August 2017 (195)
  • September 2017 (186)
  • October 2017 (235)
  • November 2017 (253)
  • December 2017 (266)
  • 2016
  • January 2016 (165)
  • February 2016 (165)
  • March 2016 (190)
  • April 2016 (143)
  • May 2016 (245)
  • June 2016 (182)
  • July 2016 (271)
  • August 2016 (248)
  • September 2016 (234)
  • October 2016 (191)
  • November 2016 (243)
  • December 2016 (153)
  • 2015
  • January 2015 (1)
  • February 2015 (4)
  • March 2015 (166)
  • April 2015 (108)
  • May 2015 (116)
  • June 2015 (120)
  • July 2015 (148)
  • August 2015 (157)
  • September 2015 (188)
  • October 2015 (169)
  • November 2015 (173)
  • December 2015 (207)
  • 2014
  • March 2014 (2)
  • 2013
  • March 2013 (10)
  • June 2013 (1)
  • 2012
  • March 2012 (7)
  • April 2012 (15)
  • May 2012 (1)
  • July 2012 (1)
  • August 2012 (4)
  • October 2012 (2)
  • November 2012 (2)
  • December 2012 (1)
  • 2011
    2010
    2009
    2008
    2007
    2006
    2005
    2004
    2003
    2002
    2001
    2000
    1999
    1998
    1997
    1996
    1995
    1994
    1993
    1992
    1991
    1990
    1989
    1988
    1987
    1986
    1985
    1984
    1983
    1982
    1981
    1980
    1979
    1978
    1977
    1976
    1975
    1974
    1973
    1972
    1971
    1970
    1969
    1968
    1967
    1966
    1965
    1964
    1963
    1962
    1961
    1960
    1959
    1958
    1957
    1956
    1955
    1954
    1953
    1952
    1951
    1950