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KURIA: Reform pension laws to boost growth, UPTAKE

There is urgent need for reforms to enable more citizens to save adequately for retirement.

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by PATRICK KURIA

News09 May 2022 - 12:39
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In Summary


  • Government needs to review pension preservation rule under RBA regulations, which allows partial withdrawal of employer and employee accumulated benefits, currently at 50%
  • Doubling or tripling the tax-exempt contribution limit will go a long way in accelerating growth in the sector.

Whilst the Kenyan pension sector is the biggest in the region, we are yet to exploit its full potential as the penetration rate remains just about 20 per cent of the working class in both formal and informal sectors.

Apart from the mention of the registration of The Kenya National Entrepreneurs Savings Trust during the 2022-23 budget, a government-backed pension scheme for informal workers, there were no other proposals directed towards accelerating the development of the pension sector

There is an urgent need for reforms in the pension industry in order to enable more Kenyan citizens to save adequately for retirement.

The government needs to review the pension preservation rule under the Retirement Benefits Authority regulations, which allows partial withdrawal of both employer and employee accumulated benefits, currently at 50 per cent, which has over the years been a hindrance to the growth of this sector.

When people shift jobs, the tendency has been to access the accumulated benefits from the schemes, yet these funds are meant to cater for them after their retirement age. As a result, many people end up retiring with very little accumulated benefits that are hardly enough to maintain their lifestyle during the post-retirement years.

This situation has forced a number of retirees to look for odd jobs and has also led to increased mental health issues among our senior citizens.


The government has extended tax incentives for contributions to a registered pension scheme by exempting contributions up to a limit of Sh20,000 per month or 30 per cent of salary, whichever is less.

However, this does not provide the contributor with any absolute tax benefit. All contributions up to the limit and accumulated incomes earned from such contributions are taxed at the withdrawal stage, save for the tax-free lump sum of Sh60,000 per year, for a maximum of 10 years of being a member of a scheme.

In 2009 the Retirement Benefits (Mortgage loans) Regulations, 2009 were issued and allowed members of pension schemes to assign up to 60 per cent of accumulated benefits as collateral to access mortgage loans.

For over a decade, Kenyans did not seize this opportunity, which led to an amendment in 2020 that gave rise to Retirement Benefits (Mortgage loans) (amendment) Regulations, 2020. The amended regulation now allows members of a pension scheme to utilise a portion (40 per cent) of their accumulated benefits to purchase residential houses.

So far, the uptake has been very low since the approval of the regulations by Parliament, probably due to lack of awareness, high mortgage interest rates and failure by the schemes to hasten the amendment of the scheme’s trust deed and rules to accommodate the mortgage rules regulations.

Paying a closer look at the taxation of the pension industry reveals that taxes are applicable at all the stages. At contribution stage, any contributions made to a registered scheme is tax free up to the statutory limit of Sh20,000 per month. Contributions in excess of the limit are either taxed on the employee where pay as you earn is applicable or the employer where corporation tax is applicable.

When these funds get into the scheme, which is the second stage, they are segregated into two separate pools for investment purposes. The first pool consists of all contributions up to the statutory limit and the second pool consists of contributions in excess of the statutory limit. Income earned from the first pool is not taxed on the scheme while corporation tax is applicable on income earned from the second pool.

At withdrawal stage, withholding tax becomes due on all accumulated contributions for the first pool together with related accumulated investment income while no withholding tax is applicable on accumulated contributions and related investment income for the second pool.

It is therefore clear that all contributions and investment incomes are taxed though are different stages, save for the tax-free lump sum.

To grow this sector and safeguard the future of our retirees, we need concentrated efforts by all the sector players, more specifically the regulator and the taxman, to ensure that a more conducive environment is created to accelerate grow.

In particular, doubling or tripling the tax-exempt contribution limit, exempting all accumulated contributions within the limit and related investment income from the tax on withdrawal will go a long way in accelerating growth in the sector.

So too will increasing the preservation rule on employer accumulated contributions and related investment income to 100 per cent upon withdrawal before attainment of early or normal retirement age and active member sensitisation efforts on mortgage rules.

Partner, PKF Kenya LLP, [email protected] 

The views and opinions are those of the writer and do not necessarily reflect the views or positions of PKF 

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