Retirement planning 101: All you need to know.
Anthony Mathenge 5th November 2015

Retirement is a delightful time in your life. Retirement is finally the time to rest and enjoy your hobbies and interests after years of hard work. It is the time to a trip to the beautiful beaches of Seychelles or learn new skills like how to fly a plane. This is definitely your time, but as with everything you do during your active years, you need to plan for your retirement wisely or you could end up spending your golden years miserably. The retirement stage of life should be a time to relax and work on that bucket list that is overdue. It is critical to therefore have a well-reasoned financial plan for retirement.

What is a Retirement scheme?

A pension plan or retirement scheme is a contract conducted by an individual or a group of people for the purpose of making provision for retirement. Contributions are made regularly, invested and at retirement are used to purchase an annuity or pension.

In Kenya, all retirement schemes need to be registered with the Retirement Benefits Authority (RBA) and the Kenya Revenue Authority (KRA). A retirement scheme needs a scheme administrator who keeps the records of the scheme’s contributions, a custodian who keeps custody of the funds and a fund manager who advises on investment of the funds.

Types of Pension schemes

Among the different types of retirement plans, there are four main types:

Employer-sponsored Plans

An employer-sponsored pension plan (company pension scheme), is a pension that is set up by your employer to provide retirement benefits to you while you are employed by them. It lets you accumulate a pension fund during your working life. In this scheme you are required to make regular contributions based on a percentage of your salary into the scheme. The employer appoints a custodian, administrator and fund manager.

SME Pension Scheme

This scheme is set up by an Insurance company who appoints a custodian, administrator and fund manager. This scheme was originally targeted at small & medium enterprises but currently it also enjoys popularity among larger companies as well. This is because it relieves an employer of the costly and time-consuming responsibility of managing an employer sponsored scheme.

Personal Pension Plans

The personal pension plans (PPPs) is a pension plan sponsored by private sector institutions usually financial sector institutions such as insurance companies, banks etc. A personal pension plan is a tax-efficient savings plan that enables you to save for retirement. Pension contributions can be made in various ways, regularly or by lump sum or a combination of both. In Kenya, individuals who contribute to such a scheme are allowed a tax deductible of up to Ksh 20,000 ($195) per month.

Benefits of a Pension/Retirement Plan

Comfort in retirement

The main goal of a retirement plan is to live in comfort during your golden years. A good pension plan ensures that you maintain your standard of living even after you leave employment.

Tax relief

Governments like the Government of Kenya have allowed for tax exemptions that come with a registered pension plan. Employees and Individuals therefore get tax relief on their contributions and hence have high take-home pay at retirement.

Saving culture

A retirement plan is for all purposes a saving plan. Very few individuals will save personally for their retirement and therefore a pension plan provides an avenue for forced saving. Contributing to a pension plan teaches you deferred gratification which is the entire idea of saving.

In case of death

Most retirement plans come with a death-in-service benefit which makes employees feel assured of their defendants’ provision in the event of death. The contributor outlines how they would like their pension money distributed to dependents in the event of death.

Have you started saving for retirement? A comfortable retirement depends on the kind of preparation you make. If you are already in a pension plan, you are off to a great start. If you aren’t, ask your employer if your company has a retirement benefits scheme, if not try to encourage the employer to start one. Otherwise, you can join an individual retirement benefits scheme.

Credit: Icon created by Liliane Lass Erbe from Noun Project.