Last week, Cytonn Investments Management released a report focusing on Financial Planning for Retirement. The report addresses the need to plan one’s finances in preparation for retirement given its inevitability, various types of pension schemes and where pension schemes invest.
The pensions industry has witnessed significant growth with the number of registered members increasing from 0.7 million in 2010 to 3 million as of December 2019, according to the Kenya National Bureau of Statistics (KNBS) FinAccess Report 2019.
Despite the aforementioned growth in the industry, about 80% of the working population in Kenya are not members of any pension scheme, which is a major cause for concern about the country’s retirement preparedness level. Below are the key highlighted benefits of joining a pension scheme:
- Income Replacement: Retirement savings ensure that your income stream does not stop even when you stop working. After retirement, many people experience a decline in the amount and stability of income relative to their productive years. Retirement savings ensures that this decline is manageable or is non- existent and enables you to be able to live the lifestyle you desire even after retirement,
- Compounded and tax-free interest: Savings in a pension scheme earns compounded interest which means that your money grows faster as even the interest earned is reinvested and grows. Additionally, retirement schemes are tax exempt meaning that the schemes have more to reinvest,
- Tax-exempt contributions: Pension contributions enjoy a monthly tax relief of up to Ksh20,000 or 30% of your salary whichever is less – this lessens the total PAYE deducted from your earnings,
- Avoid old-age poverty: By providing an income in retirement, pension schemes ensure that the scheme members do not experience old age poverty where they have to rely on their family, relatives and friends for survival, and
- Homeownership: Savings in a pension scheme can help you achieve your dream of owning a home. This can be done through a mortgage or a direct residential house purchase using your pension savings. A member may assign up to 60% of their pension benefits or the market value of the property, whichever is less, to provide a mortgage guarantee. The guarantee may enable the member to acquire immovable property on which a house has been erected, erect a house, add, or carry out repairs to a house, secure financing or waiver, as the case may be, for deposits, stamp duty, valuation fees and legal fees and any other transaction costs required. On the other hand, a pension scheme member may utilize up to 40% of their benefits to purchase a residential house directly subject to a maximum allowable amount of Ksh7 million and the amount they use should not exceed the buying price of the house.
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The report goes further to discuss the impact of COVID-19 on pension schemes and investments including a decrease in the value of assets in retirement savings accounts from falling financial markets and a lower capability to contribute to retirement savings plans by individuals, and by both employers and employees.
Pension scheme members are, however, advised to stick to their retirement plans and keep contributing if they can. Withdrawing from a pension scheme is highly discouraged as it foils the retirement plan one has and may end up reducing their income replacement ratio at retirement. It is good to note that the target is that one should have an income replacement ratio of about 75% if they are to lead the same quality of life they had before retirement.
In order to learn more about the various types of pension scheme you can join and their performance in the past, you can click here. Cytonn also provides its own retirement schemes; a personal scheme that you can join with as little as Ksh1,000, an umbrella scheme suitable for organizations, and income drawdown fund for when you retire.