BY Fred Waswa
MAR 27 – In Kenya, the retirement saving landscape presents some worrisome statistics: only 20% of the population is actively saving for retirement, with a staggering 80% having no form of safety net to tap into during retirement.
That notwithstanding, the 20% are not saving enough. However, that is set to change for the better following the enactment of the Tax Law (Amendment) Act 2024, which came online at the tail end of 2024.
The Act, which brings multifold benefits in the retirement sector, is aimed at bolstering saving culture and promoting a dignified life in retirement.
It has brought key changes, including increasing tax-free contributions to a registered pension scheme or provident fund.
Previously, individuals could contribute up to 20,000 shillings per month, which the Act has increased to30,000 shillings per month.
This translates to more savings in the pension pot while enjoying a reduced tax burden on income tax. The average retirement savings in Kenya stands at 3,000, shillings yet an ideal Income Replacement Ratio (IRR) requires at least seven times this amount.
Globally, retirees aim for a 75% IRR, but the average Kenyan retiree achieves only 34%, falling significantly short of financial security.
To make matters worse, many retirees hardly benefit from their savings, as they end up spending the one-third lump sum pension payout impulsively.
Some choose to marry an additional wife, while others rush into risky business ventures or purchase luxury items such as vehicles, vacations, and new or second homes.
This further depletes their retirement funds.With these realities in mind, the amendment and sound financial discipline will ensure financial stability in retirement, while keeping retirees from exhausting their retirement savings during a record of five years post-retirement and prevent them from inadvertently returning to active employment to meet their daily needs.
Healthcare costs remain one of the highest financial burdens in retirement and can render a retiree dependent even after saving a significant amount for a pension.
Cognizant of this risk, the enactment of the Tax Law (Amendment) Act 2024 provides for a tax-free contribution to a registered Post-Retirement Medical Fund of up to 15,000 shillings per month.
This reinforces and supports the efforts of the Retirement Benefits Authority to encourage contributing members to voluntarily save for their retirement healthcare in post-retirement medical funds within their chosen retirement benefits schemes.
With chronic illnesses on the rise among the elderly, many retirees burn through their pension savings just to cover medical costs. Ironically, during one’s working years, these expenses may seem unnecessary especially when covered by a workplace medical insurance scheme.
However, that significantly changes with old age, when literally or figuratively speaking,arthritis stiffens your joints and medical bills pile up. At that point the savings towards medical care during post-retirement feels inadequate.
This provision addresses retirees’ well-being holistically; by ensuring they can access medical care without financial strain despite receiving an appropriate Income Replacement.
A significant change in pension taxation now offers exemptions through a three-pronged approach, providing relief to retirees and long-term contributors.
First, individuals who have reached the official retirement age, as defined by their retirement benefit scheme, can access their benefits tax-free. Second, those who are forced to withdraw due to ill health or incapacitation before retirement age are also exempt.
Lastly, members who have contributed to a pension scheme for at least 20 years can withdraw without income tax deductions. Removing the tax burden on these benefits encourages long-term savings, ensuring individuals have adequate financial security when they need it most.
The enactment of the Tax Laws (Amendment) Act 2024 has also abolished the dual registration that required retirement benefits schemes to be registered with both the Kenya Revenue Authority and the Retirement Benefits Authority.
This move will make it easier for employers and individuals to set up and manage pension funds.In conclusion, the Tax Laws (Amendment) Act 2024 is a significant step towards improving retirement security in Kenya.
It provides incentives for saving, offers tax reliefs that benefit pensioners, and simplifies pension fund regulations.
For individuals planning for retirement, these changes offer a golden opportunity to maximize savings and ensure financial stability in the later years.
The writer is the Group CEO, Octagon Africa, a financial services provider of pension services, insurance brokerage, trust services, asset consulting, and training services to individuals, non-profit, public, and private sector organizations. It has a regional presence in Uganda, Tanzania, and Zambia. https://www.octagonafrica.com/
