According to data from the Retirement Benefits Authority (RBA), the majority of Kenyans do not plan for their retirement. The Kenyan economy is comprised of majorly the informal sector that is the biggest employer of a majority of Kenyans who are often running their business. The majority are those that do not have a retirement plan, as on the flipside those in the formal employment sector are already contributing through the National Social Security Fund (NSSF) which is a statutory requirement for employers. It is therefore important to have a conversation on setting up an individual retirement pension plan amongst the people not in formal retirement schemes like NSSF to start planning their retirement journey early enough.
In brief, this Article Highlights the following:
- About Retirement Planning
- Different Options of Retirement Schemes
- Public Scheme – NSSF
- Occupational
- How to access benefits on a lapsed scheme upon leaving an employer occupational scheme
- Umbellar Scheme
- Individual Personal Retirement Plan
- Why it is important to have a retirement Scheme
About Retirement Planning
Retirement is one of the vital topics that we teach in our personal finance management course. It is an important topic that an individual should consider in their financial planning journey. As you work or do your business it is important to look at the days ahead when you will no longer be active and productive to work in order to earn a living. With that in mind, it is recommended that one starts saving towards their retirement life as early as possible.
For those working in formal jobs, the employer is mandated by law through the NSSF Act to deduct and remit money towards the retirement pension of their employees. As a statutory requirement, the NSSF Act gives guidelines on the amount that employee and employer contribute towards the employee’s retirement scheme.
However, the biggest challenge is for people working in the informal sector or those who are self-employed and running their businesses without having a registered retirement plan. They are exposed to post-retirement financial crises as they do not have either pension or provident fund.
A retirement plan is basically a scheme where a person enrols on a licensed Retirement Scheme by the Retirement Benefit Authority (RBA) and commits savings towards their retirement. The contribution to the scheme for corporates will include contributions from employees and also from the employer.
Types of Retirement Schemes
In Kenya, one can plan for their retirement by contributing to either of the following schemes:
- Pension
- Provident
What is a Pension? A Pension is a scheme where one contributes towards their retirement, and upon retirement one cannot access the full amount. Currently, the law allows one to access a third of the fund as a lump sum upon retirement and the balance they can purchase an Annuity. An annuity is a contract between an annuitant and a life insurance company that guarantees the annuitant a periodic income for life. You can learn more about annuities on our other post here
What is a Provident Fund? On the other hand, a provident fund is a scheme where employees contribute towards their retirement and can access the funds in full as a lump sum upon retirement.
There are different retirement plan models that exist in Kenya:
- Public
- Occupational
- Umbrella Scheme
- Individual Pension
Public Scheme
This is currently the NSSF scheme which is a statutory scheme where all employers and registered companies are required to register with NSSF and contribute toward the pension of their employees and where not operational or not having employees, contribute to the company directors.
Occupational Schemes
This is a defined scheme where contributions to the scheme are defined or fixed as a percentage of the pensionable earnings or a defined shillings amount. They are stand-alone set up by employers only for their employees. Once an employee leaves the organization they become deferred members of the scheme.
For an employer looking to set up an Occupational Scheme, they must get licensed by RBA and the governance Structure of the Scheme must have the following providers:
- Trustee– Oversee the activities of the scheme. Often seconded by the employer company
- Administrator– appointed to manage the administrative roles of the scheme e.g. issuing member statements.
- Fund Manager – an Investment professional responsible for managing the scheme’s investing strategy.
- Custodian – Holds the assets of the Scheme
An employee who is a member of an occupational pension or provident scheme, on exit of employment before retirement, ceases to be a member of the scheme and has the following options.
Options to access your provident / Pension on leaving employment before retirement:
- Access the benefits – one can only access 100% of their contribution plus 50% of the employer portion and leave the least in the scheme. That 50% employer contribution can only be accessed upon retirement.
- Transfer the benefits – One can transfer all benefits, or the balance to another occupational scheme on joining another employer. Or transfer into an individual pension scheme.
Were you once an employee where you had an occupational Scheme and left and you would like to set up an Individual pension plan and then transfer that contribution to the individual pension plan? Get in touch with our team for assistance.
Retain the Benefits – have the benefits remain in the occupational scheme to continue earning returns and access upon retirement.
Umbrella Schemes
Setting up an occupational scheme may be a tall order for most SMEs due to the rigorous process that an organization has to go through in getting licensed by RBA, as well as getting the service providers to manage their scheme. Amidst these challenges, an organization can opt to join an umbrella scheme.
An umbrella scheme is a pension that is already set up by a sponsor and employers can join these schemes to enjoy economies of scale and avoid the hustles of setting up an occupational retirement scheme. Currently, RBA has licensed a number of insurance companies and Banks to offer umbrella schemes making it efficient, and enabling SMEs to start giving their employees retirement plans more value.
Is your organization looking for an umbrella scheme to join that gives the best value for your employee’s contribution? Look no further. Our firm through our Agency has partnered with the best providers that offer returns above average market return and with minimum administrative cost. We facilitate the onboarding process ensuring your company has a smooth set-up of an umbrella scheme.
Individual Pension Plan
As an individual, you can start your retirement plan by joining an individual pension plan where you will set aside and contribute part of your income towards building your retirement fund. Remember the 50, 30,20 budgeting rule where you have 50% of your income on needs, 30% on wants and 20% on savings. (Enroll on Personal Finance Management to learn more of this) . The 20% of the savings should be apportioned to meet your emergencies and as well towards your retirement plan.
Facts on Individual Retirement Pension Plans
- It is not an Invest, but a plan to have guaranteed income upon retirement
- It can be set up and you start contributing at any time. You do not have to wait till you are almost reaching retirement age.
- The plan can either be a provident or a pension
- You cannot access the money before hitting your retirement age
Why you should Set up an Individual Retirement Plan
Picture your future and imagine yourself at retirement age, after all the years of hard work at your workplace or job- you will no longer be productive to continue working and you will need to retire with guaranteed income to meet basic needs like food, shelter, clothing and healthcare.
This can only be guaranteed by having an individual retirement plan. This is very significant for individuals in sectors where they are not in formal employment or running their own business and do not have a pension plan examples include business people, and professionals like lawyers, accountants, doctors etc. practising as sole.
Why retirement schemes and not investment in Money Market, Equity Market, or SACCOS?
With a retirement plan, you are planning on growing a fund that is locked and in the custody of licensed schemes, which can only be accessed upon retirement. You are therefore guaranteed the benefits. On the other hand, these other investments can be accessed before therefore jeopardizing your retirement income. They are better for short-term finance planning.
Upon retirement, you can use the benefits from the individual pension plan to start a project, pay off a mortgage or purchase an annuity.
Contributions to a pension plan are tax allowable on arriving at the taxable salary of an employee. The employer contributions towards the scheme are also allowable deductions while computing corporate tax. It is therefore a win-win for both employee and employer.
Wrap Up
As a good practice and towards achieving financial freedom, it is important to have a financial plan like an individual pension plan towards your retirement. By contributing towards your retirement you are guaranteed an income in the years to come while you will not be productive and active to generate income.
A company can enhance and create value for their employee by setting up occupational schemes or joining umbellar schemes that come at a less administrative burden while on the other hand harnessing professional management. A company can also contract out NSSF Tier 2 to a scheme that offers better returns. These contributions are tax-deductible while computing corporate tax, meaning the company will be boosting the morale of their labour force while enjoying the tax relief benefit.
A majority of the large Kenyan population not in any scheme including the state statutory NSSF, can have an Individual pension plan and start saving towards their retirement. This also includes self-employed business people running different businesses in the different sectors of the economy. To set up any of the models discussed on retirement planning you can get in touch with our team for assistance. We have partnered with licensed schemes that would offer value and grow your contributions over time giving you peace of mind knowing your future is well guaranteed of income upon retirement.