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
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 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
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.