The reality of life is no one remains young forever. At some point in life, you will get old and perhaps retire from your job. However, you will still have financial needs and obligations to meet. So, how do you do it?
The answer to this question is very simple. Start investing in a pension scheme as early as you can. Hence, this article focuses on the key benefits why you need to invest in a pension scheme in Kenya.
What is a pension scheme?
A pension scheme is an entity that pools funds, invests them, and pays the investors at retirement. Normally, you make contributions regularly to the scheme as your retirement investment. Pension schemes in Kenya are licensed and regulated by the Retirement Benefits Authority.
The scheme is then mandated to invest your contributions and pay returns yearly. There are two types of pension schemes. These include;
Pension fund – This is a pension scheme where at retirement, you get part of your pension as a lump sum while the rest is paid regularly such as monthly. These types of schemes are most common among public service workers.
Provident fund- It is a pension scheme where both the employer and employee make monthly contributions. At retirement, the employee gets both the contributions and investment income as a lump sum. This type of scheme is common in the private sector. However, the member can choose to purchase an annuity plan at maturity.
Benefits of Investing in a pension scheme
Tax reduction– This is one of the key benefits you get by investing in a pension scheme in Kenya. Contributions to a pension scheme are tax deductible resulting in huge savings on your tax burden. According to the law, you are allowed up to 20,000 shillings tax-free contributions per month. This translates to 240,000 shillings per year.
The income earned by the pension schemes from investing in members’ contributions is also tax-free resulting in higher earnings by members.
Savings enabler-Contributions to a pension scheme act as a savings enabler by paying some amount of your income per month to the scheme. Hence, this is a key strategy for those poor in savings. In most cases, these funds would be wasted if they came with the normal salary.
Investment income– The pension manager should invest your contributions according to the Retirement Benefits Authority guidelines. These guidelines stipulate how a pension scheme should invest your contributions per investment option. Income from these investments is normally paid back to the investors. Hence, your contributions will keep growing with the investment income.
Purchase of mortgages- According to the Retirement Benefit (Mortgage loans) amendment 2020, you can access up to 40% of your retirement benefits to buy a house. However, there is a cap of up to 7 million shillings. This has made it easy for interested homeowners to tap into their contributions.
Retirement financial security– The key role of investing in a pension scheme in Kenya is to build financial security for your retirement. Having a pension scheme plan enables you to meet financial obligations when you are longer actively employed.
Beneficiaries payment– In case of death, your beneficiaries can get the pension benefits on your behalf. This may happen either as a lump sum or monthly depending on the type of scheme.
Financial information- Pension schemes are required to offer regular financial training and information to their member on areas such as contributions and benefits. This ensures you are up to date with contributions progress. Some of the approaches to this happens is by sending members statements yearly. This is a key benefit as to why you need to invest in a pension fund.
Low returns– In some cases, you can invest in a pension scheme in Kenya that is paying below the market average returns resulting in a loss in your savings. Always ensure you are part of a scheme that pays above-average returns in the market.
Lack of immediate funds access– The nature of pension schemes is that you can’t draw the funds before attaining the retirement age. Even if you want to cash out earlier, you will have to incur withdrawal costs such as taxes. It is also not possible to access 100% of your contributions before attaining a certain age.
Factors to consider when joining a pension Scheme
Now that you understand the benefits of why you need to invest in a Pension scheme in Kenya, let’s look at some of the factors to consider when joining one.
Regulation- According to Kenyan law, all pension schemes in the country should be licensed by the Retirement Benefits Authority. This is the institution whose mandate is to register and regulate these schemes. In case you have any doubt regarding a specific scheme, you should engage the regulator directly for clarifications. Find the list of all registered pension schemes in the country.
Investing in unregistered schemes exposes you to losses due to fraud.
Returns- You should seek to settle on a scheme that offers you the best returns from your contributions. This is the only way to ensure you are getting value in the market. Some of the ways to determine the level of returns are by doing a background check on the schemes’ past performances.
A scheme that has been paying high returns in the past is likely to continue with the same trend in the future.
Size of the scheme – It is advisable to settle on a well-known known and bigger scheme. The size of a scheme indicates more people have faith in it. The bigger scheme also tends to enjoy economies of scale in its operations resulting in better investor returns.
Leadership- You should only invest in those schemes that have competent leadership. The best way to evaluate this is by doing a background check on the academic qualifications and experience of the leaders. You should avoid those schemes that have leaders with a controversial past.
Making contributions to pension schemes is a mandatory process as per Kenyan law especially if you are working in the formal sectors both at the public and private sector levels.
However, to get more value, you should optimize the use of some available benefits such as tax deduction. If you are contributions less than the allowed limit of 20,000, you can use the remaining room to get maximum tax benefits.
Another key action to do is to ensure your beneficiary list is well updated. This enables them to get maximum benefits to incase there is any occurrence such as death. As per the law, you can change the beneficiaries list by either adding or removing as you wish at any time.
Finally, it is good to note that investment in your retirement is among the best financial decision that you can do at an early age.