Workers should give saving for retirement a priority
There has been a raging debate on the management of retirees in the country. Pensioners believe they served their country in their heyday and should be taken care of by the State.
The government, on the other hand, has been toying with the idea that retirees need to plan their retirement on their own. Since its undertaking to help the elderly, the pension budget has increased from Sh25 billion in 2008/09 financial year to Sh86 billion in 2018/19.
Kenya’s population has grown steadily from 15.3 million in 1979 to an estimated 50 million prior to this year’s census.
When the pension framework was designed, re-employment among retirees may not have been foreseen. But now that governments are confronted with this development, legal frameworks are needed to accommodate it. This has led the introduction of three-year contracts by the Public Service Commission for newly-employed civil servants.
Unless a miracle happens, such demographics and moves guarantee that the State system of pensions and medical care will not provide the comfortable lifestyle most current workers anticipate.
Ideally, a government is expected to project population growth and to cultivate in itself and its citizens strong economic and social practices to avoid shocks.
Unfortunately, Kenya’s pension coverage remains at a 20 per cent low, with informal sector, which employs about 83 per cent of Kenyans, uptake at less than one per cent.
Needless to say, the thinking has to shift to that of a joint responsibility between the State and the pensioner. As the State takes care of all citizens, every citizen has to prepare for their retirement.
In private sector, however, the situation is different because most employers only offer the State-sponsored retirement programme—National Social Security Fund—while ignoring the equally important private pension initiatives. This only leaves retirees with about Sh170,000 before interest and tax if they worked for 35 years.
As a backup plan, Kenyans should learn to plan well ahead to save a decent amount for their retirement. The only incentive available for people to save for retirement has been that retirement contributions are tax-exempted. That narrative has ceased in its appeal because all retirement contributions in Kenya are tax deductible.
The contributions are only thought to be exempt from pay-as-you-earn tax but upon retirement, unless one is above 60 years, part of their benefits may be taxable. This policy negates every effort by government of offering potential retirees tax incentives to encourage them to save more for retirement.
Given the current national debt and wage bill burden, it will be understandably difficult for the government to honour all its obligations while exempting pensioners from paying tax. Thus, taxation on retirement benefits is expected to continue growing.
Prospective and active retirees have to, therefore, be careful to avoid certain mistakes that will make them pay more taxes, such as premature withdrawals and miscalculation due to ignorance in social security taxes.
Suffice to say, Kenyans are vulnerable to poor financial planning. The first task for the State should be to strive to improve financial literacy by using every available resources. Individuals should also consult with pension planners for best strategy to meet retirement goals.
No better option is available than planning for retirement at the very beginning of a career.The writer is a pension consultant at Enwealth Financial Services