Putting money aside during your active working years is one effective way of ensuring your financial stability in old age. And the best way to do this is to join a retirement benefits scheme.
Retirement benefits schemes allow you to save money through regular contributions. Your accumulated savings are invested, and the returns are vested (added) to your retirement benefits. Upon retirement, you receive your accumulated fund as a lump sum or regular monthly payments.
This guide to personal pensions offered by insurance companies in Kenya has everything you need to know.
Content:
- Insurance-guaranteed personal pension plans ↴
- Why you should join a retirement benefits scheme ↴
- Joining a retirement benefits scheme ↴
- Frequently asked questions ↴
- What tax benefits apply to a pension? ↴
Insurance-Guaranteed Personal Pension Plans
Life insurance companies are the chief providers of retirement benefits in Kenya. Their schemes offer both occupational and personal pension plans.
Once you are a member of a personal pension plan, you make regular contributions towards your retirement benefits. The insurance company invests the money to earn more income and adds this income to your pension – vesting.
What makes using insurance companies as your pension provider a worthy consideration?
Unlike most personal pension providers, insurance companies guarantee your contributions. This means, regardless of the investment performance, your total contributions will be available at retirement.
But that’s not all. Insurance companies also offer a minimum rate of return they expect from the investment of members’ contributions.
Read more about the main types of pensions. →
A retirement benefit plan is different from a life insurance policy
While you can look at a personal pension plan as a form of insurance – you pay regular contributions to your scheme to protect you financially when you retire and are not actively working – it is not a life insurance policy.
You take out a life insurance policy to protect the financial future of those who depend on you for basic needs if you die unexpectedly or are no longer able to provide for them.
Read more about how life insurance works. →
Why You Should Join A Retirement Benefits Scheme
An effective way of preparing for retirement
It is a good idea to set money aside for retirement. This way, you get to enjoy the lifestyle you desire when you start working less and have fewer sources of income. In addition to catering to your basic needs, this money can also help you afford health and care services that increase with an increase in age.
Remember that expecting your children or other people to take care of you in old age is never a sure bet.
Helps you save for retirement
Saving requires discipline. And getting yourself to make regular contributions towards your pension pot, say monthly, is an excellent way to ensure this discipline and secure your retirement. Also, these funds are usually not as readily available for withdrawal as the money in your bank account.
Your benefits are guaranteed
As mentioned before, retirement benefits offered by insurance companies come with the guarantee of your contributions. You also get a minimum rate of return on the investment of your accumulated funds. So, if the investments perform less than expected, the insurance company bears the losses. Your money is safe.
You enjoy tax reliefs
Like any money saved under a registered retirement scheme, you also enjoy government tax reliefs on your pension. Besides the tax benefits on your contributions, investment returns and benefits payouts after age 65 are tax-free.
Joining a Retirement Benefits Scheme
Membership to retirement benefits schemes offered by insurance companies is open to anyone above 18 years old. You can join one whether you are employed or are self-employed. You only need to be able to make contributions towards your pension.
To kickstart the process of enrolment, you will need to fill a simple application form. Here you will provide information such as your age and nominate your beneficiaries. Your scheme membership will commence with the payment of your first contribution.
You can sign up for a personal pension plan whether you have a workplace pension or not. Small businesses also use retirement benefits schemes to provide an occupational pension plan for their employees.
Frequently Asked Questions
Can my employer contribute to my private pension scheme?
Yes. Your employer can contribute to your pension and treat that amount as a tax allowable expense on their books of accounts. This arrangement can be a fixed amount or a percentage of your monthly salary.
Do my contributions earn any interest?
Yes. Your insurance company invests the contributions you make towards your pension and vests the returns on your benefits. Therefore, the total benefits include your contributions plus returns on investment.
Can I lose my money in the retirement benefits scheme?
Since your insurance company guarantees your capital, you cannot lose your contributions. You, therefore, don’t bear any investment risk, making this option a worthy consideration.
What happens to my benefits if I leave my job?
Personal pension plans belong to individuals. So, your pension is not affected by changing jobs or leaving your employer.
What happens if I die before withdrawing my benefits?
The applicable death benefits are paid out to your nominated beneficiaries if you die before reaching retirement age or withdrawing your benefits. You or your beneficiaries also receive your retirement benefits if you are no longer able to work.
Can I use my pension fund as collateral for a loan?
Yes, you can. Subject to the applicable waiting period, you can use your accumulated retirement benefits as security to borrow money. The Retirement Benefits (Mortgage Loans) (Amendment) Regulations 2020 allows members of retirement benefits schemes to use up to 40% (up to a limit of KES 7M) of their accrued benefits to purchase residential houses.
What happens when I retire?
If you were in a pension scheme, you can take 1/3 of your total fund as cash after deducting applicable taxes. You’ll then receive the remaining 2/3 of your benefits as regular monthly payments for the rest of your life.
If you were in a provident scheme, you can access your total benefits as a lump sum after deducting applicable taxes.
What tax benefits apply to a pension?
- The Income Tax Act allows a tax relief on contributions to a registered retirement benefits scheme up to a maximum of KES 20,000 per month or 30% of your salary, whichever is less.
- Investment returns on your accumulated pension funds are tax-free. The money vests onto your fund and increases your benefits.
- When you take a lump-sum payment from your fund, the first KES 600,000 is subject to tax exemption if you’ve been a member of the scheme for more than 10 years.
- If you retire before age 65, you can withdraw up to KES 300,000 without paying tax. Lump-sum payment and monthly pension income after age 65 are tax-free.
