TAX BURDEN

Stop taxing retirees, pension firm tells government

Retirees are forced to part with 30 per cent of their earnings when receiving their benefits after retirement

In Summary

• Since independence, public workers have enjoyed free retirement benefits that are fully paid for by taxpayers through the Consolidated Fund

• The state is now seeking to reduce spending on the pension budget, which is expected to grow by 21.4 per cent in the coming financial year to Sh104.4 billion

Elderly persons queue outside for their pension
PENSIONERS: Elderly persons queue outside for their pension
Image: FILE

The government should exempt pensioners’ earnings from taxation to boost the country’s savings culture.

Speaking to the Star, Enwealth managing director Simon Wafubwa said retirees who have been making contributions throughout their entire working life should not be subject to taxation when it comes to payouts.

“While they (pensioners) are working, they are paying taxes, when they retire they should not pay tax because they are old and tired” he said.

While the contributions and income made from investments through pensioners’ savings are currently not taxed, retirees have to part with 30 per cent of their earnings when receiving their benefits after retirement.

According to Retirement Benefit Authority chief manager for research and strategy Alfred Ouma, if a member opts to keep their savings until the retirement age of 65 they are not susceptible to the tax rate.

“At the payout phase, tax is at 30 per cent but of course there is the first payment of Sh600,000 which is exempt. So the rest is taxed progressively,” he said. “We probably need to engage policy makers to have the age revised from 65 to 60 years.”

This even as 10 years ago, the state decided to raise the retirement age for civil servants from 55 to 60 years. The move was meant to slow down the number of retirees entering the pension pool and offer the government some headroom to set up the contributory scheme.

“We are now happy that the civil service pension scheme which is now being converted to become contributory,” Ouma said.

Since independence, public workers have enjoyed free retirement benefits that are fully paid for by taxpayers through the Consolidated Fund.

The state is now seeking to reduce spending on the pension budget, which is expected to grow by 21.4 per cent in the coming financial year to Sh104.4 billion.

The pension budget was becoming unsustainable having increased more than three-fold over the past 10 years, from Sh25 billion in the 2008/9 financial year to Sh86 billion currently.

A report by RBA shows the overall retirement assets under management grew by two per cent in the third quarter of 2018 to Sh1.19 trillion.

“This growth was not however so impressive owing to the dismal performance in the capital markets during the quarter under review,” the report stated.

Wafubwa said abolishing taxation on retirees benefits as well as increased public education on savings for post-work living would go a long way in boosting national savings which have stagnated at below 20 per cent.

“With the growing economy, we have more disposable income that can enable members to save for retirement,” he said. “We need to have better incentives by way of taxation as tax relief for pensioners such that if they do contribute they should not be taxed at all.”

Workers’ savings have long been seen as ideal in funding infrastructure projects, which are long-term in nature, taking between 10 and 30 years to generate returns.