5 Major Ways to Avoid Tax by Saving through a Pension Scheme in Kenya.

Pensions play a crucial role in financial planning and retirement savings. In Kenya, individuals can take advantage of pension schemes not only to secure their future but also to maximize tax savings. There are various ways individuals can leverage pension schemes to optimize their tax position and build a solid foundation for retirement.

Pension schemes in Kenya are designed to provide individuals with a regular income or lump sum payment upon retirement. They are governed by the Retirement Benefits Authority (RBA) and offer tax advantages to encourage individuals to save for their future. There are two main types of pension schemes: occupational (corporate) pension schemes and personal pension schemes.

1. Contributions are tax-exempt up to a maximum of Kshs 20,000 per month.

One of the key advantages of contributing to a pension scheme in Kenya is the tax relief offered on contributions. Individuals can deduct their pension contributions from their taxable income, reducing their overall tax liability. The tax relief is subject to certain limits set by the RBA, ensuring that individuals can enjoy the benefits while maintaining the integrity of the tax system.

Contributions to a pension scheme are tax-exempt up to a maximum amount of 20,000 shillings every month and 240,000 per annum. Employer contributions are treated as tax-free expenses in their financials hence an added advantage to the employers. Employees and Employers are encouraged to maximize the tax-exempt pension contributions to save on tax.

Example: If your basic salary is Kshs. 50,000 and you contribute or save 6% (3,000) of your basic salary to a pension, you will end up saving 900 shillings a month and 10,800 shillings a year.

2. On withdrawal, Kshs 60,000 is tax-free for every year in the scheme up to a maximum of 10 years.

Kenya's tax laws provide that pension scheme members can withdraw Kshs 60,000 tax-free per year, for up to 10 years, at the time of withdrawal. This means that if an individual has been a member of a pension scheme for at least 10 years, they can access Kshs 600,000 of their pension savings tax-free. This provision presents a unique opportunity for individuals to optimize their tax position in retirement.

Above are the tax brackets used when determining the tax expense when accessing your pension savings. The tax brackets may change from time to time pending on any amended from the Kenya Revenue Authority (KRA).

Example 1; access to pension savings before the retirement age of 50 years and above:

If you have saved Kshs 1,000,000 in the scheme you have been saving for a period of 10 years and your age at the time of exit from the employment is 40 years old, below is an illustration of tax expenses and how a tax-free amount helps you save on tax.

Example 2; access to pension savings after attaining the retirement age of 50 years and above:

If you have saved Kshs 1,000,000 in the scheme you have been saving for a period of 10 years. Your age at the time of exit from the employment is 51 years old, below is an illustration of tax expenses and how a tax-free amount helps you save on tax.

Tax-free withdrawal provisions provide a unique opportunity for individuals to optimize their tax position when withdrawing from pension schemes in Kenya. By planning their withdrawals, structuring their income sources, and exploring other tax-advantaged retirement options, individuals can maximize their overall tax savings.

3. Up to Kshs.25,000 per month are tax-free on Annuity and Income Drawdown payments.

In Kenya, individuals can leverage the tax benefits offered on annuity and income drawdown payments to optimize their tax position in retirement. Annuity and income drawdown are popular options for receiving retirement income. Annuity payments provide a fixed regular income, while income drawdown allows individuals to withdraw funds from their pension pot as needed. Both options offer tax benefits, with a portion of the payments being tax-free.

Individuals receiving annuity payments can enjoy a tax-free allowance of up to Kshs. 25,000 per month. This means that a portion of the annuity income, up to the specified limit, is exempt from income tax. If a retiree is received a monthly allowance of more than Kshs.25,000, all applicable taxes will be exempt from age 65 years and above.

Tax laws and regulations can change over time, impacting the tax treatment of annuity and income drawdown payments. It is important for individuals to stay informed and regularly evaluate their retirement income strategy. Seeking professional advice from tax experts and financial planners can provide valuable insights on optimizing tax efficiency and adapting to any changes in tax legislation.

4. No taxation after the attainment of 65 years on withdrawal payments or annuity.

Reaching the age of 65 in Kenya brings significant tax advantages for retirees. The tax exemption on withdrawal payments and annuity income allows individuals to enjoy a tax-free retirement income, providing financial security and peace of mind. By carefully planning retirement withdrawals, maximizing the benefits of tax-free annuity payments, and seeking professional guidance, individuals can optimize their tax position and create a sustainable retirement plan. Regular review and adaptation to changes in tax laws are essential to maintaining tax efficiency and ensuring a comfortable and tax-free retirement.

5. Corporate Tax exempted on Investment income in the scheme.

Pension schemes in Kenya enjoy a tax exemption on investment income generated within the scheme. This exemption means that the investment earnings, such as dividends, interest, and capital gains, are not subject to corporate tax.

The tax exemption incentivizes corporations to participate in pension schemes and contribute towards long-term savings for their employees. By exempting investment income from corporate tax, companies can contribute more generously to pension funds, thus securing the financial future of their workforce while simultaneously benefiting from the tax advantage.

Individuals and companies are encouraged to save for retirement through a pension scheme to enjoy a number of benefits. With the enactment of the NSSF ACT 2013, the pension industry and savings are expected to increase as the employees and employers are expected to save up to 6% of their pay towards a retirement scheme.

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Wycliffe Michieka CPAK, TDPK