Pension plans

Retirement/Pension Schemes

Retirement is the longest holiday and failing to plan for this time is planning to fail. Pension/ retirement plans provide individuals with income during their retirement years when they are no longer earning a regular income from employment. In Kenya, retirement schemes are designed to provide financial security to individuals during their retirement years.
These plans aim to help individuals save and invest money throughout their working years, so they can support themselves financially once they retire.
These are some of the common types of retirement schemes available in Kenya, each offering different features and benefits to help individuals save for retirement and achieve financial security in their later years:

What are the Various Ways of Saving For Retirement?

  1. Government Sponsored Plans
    The National Social Security Fund provides basic financial security to Kenyans upon retirement. Contribution is compulsory for employers and employees. However, the benefits paid out are often not enough to provide for retirement.
  2. Employer Sponsored Plans
    These schemes are formed by the employers for the benefit of their employees. It is not compulsory for employers to form pension schemes. Many employers in Kenya have not set up retirement schemes meaning that their employees have to plan for their own retirement saving.
  3. Individual Pension Plans 
    Employed people who are not in an employer sponsored scheme as well as self-employed people can join an Individual Pension Plan.
  4. Umbrella Schemes 
    Umbrella retirement funds are multi-employer pension schemes managed by trustees or fund managers. These funds pool contributions from multiple employers and members, offering economies of scale and a wider range of investment options. Members can access their retirement benefits upon reaching retirement age.

Personal Pension Plans (also referred to as retirement plans) are mainly offered by insurance companies to help individuals to build up a sum of money that can be used in retirement. The money is invested to generate a regular income, which is referred to as pension. A Pension Fund involves regular contributions to a registered scheme overseen by the Retirement Benefits Authority (RBA).
In Kenya, registered schemes are listed on the RBA website

Why is it essential to plan for retirement?

  1. Retirement is guaranteed therefore saving will provide a financial safety net during retirement, ensuring a steady income stream to maintain the standard of living and cover expenses such as food, housing, medical bills, electricity and daily needs.
  2. Offers tax relief benefits encouraging individuals to save for retirement. Contributions to a retirement benefits scheme are tax exempt as per the set limits (Kshs. 20,000/- per month or 30% of salary, whichever is less). The return earned on the investment is also tax exempt.
  3. The family unit is weakening. It is a reality that parents will not be able to depend on their children for their upkeep in old age due to a breakdown in the traditional systems that provided security in old age. Are you sure that your children will take care of you in your retirement?
  4. You are expected to live longer due to advances in the medical field. You will need more money in retirement to cater for the expected longer life.

How Does A Personal Pension Plan Work?

The contributions have a 100% capital guarantee. The retirement benefit schemes managed by Insurance companies are guaranteed funds which means that the insurance company guarantees the capital put into the scheme plus a minimum rate of return.

• Contributions are flexible depending on your financial ability and your needs.
• Contributions are easy to make through deductions from your salary, Direct Debits, M-Pesa, etc.
• The fund earns compound interest. This allows small regular contributions to grow to significant retirement savings over time.
• It gives the member an opportunity to save and improve financial security in his/her retirement.
• It offers a pooling advantage. Funds from various members are pooled together to form a huge fund that allows a larger scale of investments, resulting in higher returns.
• Withdrawal terms are flexible.
• An employer can contribute on behalf of the employee as long as the combined contributions do not exceed 30% of the employee’s salary. Any amount above this will not enjoy tax exemption benefits.
• Provides various flexible payments to a member at retirement i.e lump sum, Pension/ Annuity and even the option to keep the savings invested and draw an income from it.

CAN I USE THE BENEFITS AS SECURITY TO BORROW MONEY?
Allows one to create a fund of which 60% may be used as additional security for a mortgage.

WHAT HAPPENS IF I DIE OR BECOME COMPLETELY UNABLE TO WORK?
The total fund made up of contributions and investment returns is paid to the nominated beneficiary immediately upon the death of the member. The total fund is also paid to you or your beneficiary in case you become ill and completely unable to work.

CAN YOU TRANSFER PENSION FROM PREVIOUS EMPLOYER(S)?
Yes. When you change employers, or switch from employment to pursue business ventures, Exotix Insurance Agency will assist you to transfer all your benefits and consolidate all your pension in an individual pension plan.

WHAT HAPPENS WHEN I RETIRE?
If it is a pension scheme, you are allowed to take 1/3 of the Total Pension Fund as cash (after applicable taxes). The remaining 2/3 of the Total Pension Fund is converted into a monthly pension (annuity). which is paid to you at the end of every month for the rest of your life.
If the scheme is a provident scheme, then the entire fund (subject to applicable taxes) is paid to you as a lump sum at retirement. Pension and lump sum payments after the age of 65 are tax free. You can put this in a Income Draw Down Fund where you leave your money invested and take a regular income direct from the fund.

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