Demystifying personal pension plans

April 15, 2009
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, NAIROBI, Kenya, Apr 15 – Financial experts say no matter one’s age after the first day of work, it is important to decide what retirement age feels right, then work on the pension plan with that in mind.

But despite the ongoing local awareness campaigns on the need for more Kenyans to take up pension plan, financial and investment adviser Tabitha Mwirigi of Money-Wise Financial Consultants notes that individual pension plans are complex products thus the need to expound on them if such awareness campaigns are to bear fruits.
 
Mwirigi says a Personal Pension Plan (PPP) is suitable to the self-employed and employees who want to save for their retirement and are not members of any other retirement benefits scheme in Kenya. They are mainly designed to offer a lump sum and income in retirement.

“The objective of the pension plan is to provide an individual with an investment plan into which they may contribute savings for use in retirement,” Mwirigi adds.

According to Joseph Jamwaka, the Life Manager at the Association of Kenya Insurers (AKI), ideally, the amount to contribute towards any retirement benefits plan should be premised on the targeted pension the member wishes to earn on retirement.

“It is universally accepted that a targeted pension of 70-80 percent of final salary would provide sufficient retirement income,” he adds.

The Personal Pension Plan works on pooling of funds concept. In the scheme, one’s contribution and any additional contributions from a third party, such as an employer is invested to build up your Retirement Benefits.

The contributions made to a personal pension scheme are usually invested by insurance companies following guidelines by the Retirement Benefits Authority (RBA). Mwirigi advises investors to make sure any independent pension scheme that one decides to join is registered with the RBA and is authorized under the Income Tax Act, and therefore enjoys tax benefits.

Jamwaka notes that the government provides valuable tax concessions to pension schemes as a way of encouraging saving for retirement. The tax benefits accorded to pension schemes relate to contributions, investment income and benefits paid.

In the report, Challenges and Prospects for Individual Retirement Benefit Schemes, Jamwaka notes that taxation benefits include a maximum tax-free lump sum threshold of Sh480,000 is allowed at retirement.

Members who wait before accessing their benefits or remain in schemes for more than 15 years enjoy widened pay as you earn (PAYE) tax bands of Sh400,000 and hence pay lower taxes. Members who withdraw from schemes early pay tax at normal PAYE rates.

On the other hand, pensioners are allowed a tax-free pension of Sh15,000 per month (or Sh180,000 per year)
Mwirigi further explains that contributions made to a personal pension scheme are usually invested by insurance companies following guidelines by the RBA.

“The Pension Plan requires you to make payments into the scheme on a regular basis, usually once a month. Although there is no limit as to how much one can save in the scheme, the amount that qualifies for income tax benefits is adjusted from time to time by the Finance Minister in the budget,” she notes.

It is important for investors to understand how one’s contribution is managed. “Money is invested in interest earning asset such as Treasury Bills and Treasury Bonds, and shares, on your behalf through the scheme and the amount of money you get when you retire will depend upon how much you contribute and how it has been invested,” she adds.

Whether to contribute to both a PPP and the scheme with one’s employer at the same time may confuse many however, Mwirigi notes that additional voluntary contributions is where a member of an employers pension scheme chooses to boost their retirement benefits by making additional payments into their employers pension scheme or into a personal Pension Plan.

She says the safety of one’s cash is guaranteed as the money received by the custodian (provider of the PPP) is reported periodically to the Trustee (usually a bank) and the regulator, the RBA. “This structure minimizes risk and enhances the safety of your money,” she says.

The access to retirement savings is regulated under the income tax act and the RBA Act meaning that one may access his pension savings upon attainment of the retirement age or on early retirement at the age of 50.

“Retirement savings should be considered along other financial priorities, such as a loan, mortgage or paying off any debts you may have,” Mwirigi notes.

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