Pension firm wants more tax relief for Kenyan retirees

Alexander Forbes Director James Olubayi (left) and Chairperson Board of Trustees Alexander Forbes Lucy Kambuni during yesterday's briefing. [PHOTO:WILBERFORCE OKWIRI/STANDARD]

Financial services provider Alexander Forbes wants all retirees to earn tax-free pension benefits. The firm which manages dozens of pension schemes, also wants the Government to increase tax-free retirement savings from the current Sh20,000 to make life easier for pensioners.

Currently, benefits for retirees above 65 years are not taxed. Alexander Forbes wants the age bracket reduced to 55 for more people to benefit.

James Olubayi, an executive director at Alexander Forbes noted that because most people retire at 55, it means a lot of retirees still do not benefit from this tax relief. “Remember those who are being taxed have been paying tax all through their lives and this is the very last income they get. So it would be nice to see something happen so that it can at least make sure they take home benefits is not compromised by taxation,” said Olubayi.

Retirement contributions are tax deductible. The Income Tax Act allows for a maximum tax deductible contribution of Sh20,000 per member per month (or 30 per cent of your salary whichever is less). The income earned from investments is tax free and therefore generates more funds for reinvestment.

According to the Act, the first Sh600,000 of a lump sum payment is not subject to tax if someone has been a member for more than 10 years. However, on retirement before 65 years, the annual tax
free pension is Sh300,000. Pension and lump sum payments after the age of 65 are tax free, why Alexander Forbes want this reduced to 55 for more retirees to benefit.

Fred Gikutu, a board trustee at Alexander Forbes said that although the Government does not tax upto Sh20,000 of retirement contributions, it was not enough. “We are not critical of the government’s taxation. All we are saying is that they can go a little bit further to make it better. For example, medical cover is usually not taxed when you are employed so if you then retire, how does the government tax that?” he wondered.

Voluntary contributions

Olubayi said that they do not know how the Government reached at the Sh20,000 threshold. He proposes that the Government increase the tax exemption-bracket on a yearly basis if they want to use a monetary limit. “The alternative would be, rather than trying to do that (peg the taxation on a monetary value such as Sh20,00) they should perhaps sit with the industry, get a number now and then index-link it to something like inflation or consumer-price index,” said Olubayi.

They noted that tax reliefs would go a long way in encouraging people to save. Olubayi said that one of the major challenges of pensions industry in the country is the low coverage. Only 15 per cent of employees in the country contribute for their retirement benefits.

“Majority of employees will only contribute that which is mandated in their respective organisations. There is a lot more that can be beneficial to them if they were to make these additional voluntary contributions. The opportunity that you have as an employee to get a return through a provident pension fund is much greater than what you will find as an individual out there,” said Olubayi.

In his budget speech, the CS for National Treasury Henry Rotich proposed to bring laws that would result in the reform of the retirement benefits sector.