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Why saving for retirement should be mandatory

By Pauline Gathuri | June 30th 2015 at 00:00:00 GMT +0300

Kenya, like many nations seeking to develop expediently, is pursuing economic development through a capitalist economic system. This has over the years led to changes to social and economic lifestyles, arising from the transition we have had to make from a once traditional system to a modem capitalistic lifestyle.

One area of life that has undergone a radical change is that of social security - particularly with regard to poverty in old age. In the traditional African society, social security systems were assured. These took the form of practices and social norms that ensured that the elderly were taken care of by other members of the society. The socio-economic changes are increasingly leading to a breakdown in traditional systems of old age security.

Fortunately, the capitalist economic system has brought with it other ways of ensuring old age security. The principal is membership of a retirement-benefit scheme, which provides payments to retirees in the form of pension or lumpsum payments.

A retirement-benefit scheme can therefore be looked at as a form of insurance for which you pay premiums while you are working against the predictable risk of a period without earnings later in life. The scheme guards against the risk of poverty in old age by ensuring that retired members of a scheme are able to provide for themselves in retirement.

It is now a personal responsibility to ensure that you have taken the necessary steps to plan for your retirement life. The easiest d way of providing a comfortable retirement for yourself is by joining a retirement-benefits scheme. It is necessary to plan for retirement by joining a pension plan to avoid the ‘old age trap’ for the following reasons: First, it is inevitable that as active as we may be today, there will come a time in life when we will have to retire. However, our living expenses such as food, medical, housing, electricity etc do not retire.

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Upkeep in old age

Hence, saving in a retirement-benefits scheme now helps us save and create the much-needed income in retirement, to cater for these expenses. Secondly, weakening of the family unit means that parents will not be able to depend on their children for their upkeep in old age.

Advances in the medical field have translated to longevity of life. You will need more money in retirement to cater for the expected longer life. There are also tax benefits that accrue from saving in a registered retirement-benefits scheme. Contributions to the scheme are tax exempt as per the set limits (Sh20,000 per month or 30 per cent of salary whichever is less) and the investment returns are also tax exempt.

The plan provides a disciplined way of saving and the money is not readily available for withdrawal like money in a bank account. There are mainly three available vehicles for providing for retirement, the first one being Government-sponsored arrangements.

This is through the National Social Security Fund. This is compulsory but its common knowledge that the benefits are meager and not enough to provide for retirement.

Secondly, there are employer-sponsored schemes, formed by employers for the benefit of employees. It is not compulsory for employers to form pension schemes and many employers in Kenya have not set up retirement schemes, meaning that their employees have no form of planning for their retirement.

There are also individual pension plans, whose membership is open to all employed persons not in employer-sponsored schemes and also people in self-employment. Insurance companies are the main founders of the personal pension scheme.

The appointed corporate trustees run the scheme as a trust on behalf of members. The schemes are registered by the Retirement Benefits Authority and Kenya Revenue Authority and enjoy all the benefits enjoyed by the Occupational (Employer) Retirement Benefit schemes.

-The writer  is a senior manager, Life Insurance at the Association of Kenya Insurers.

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retirement retirement benefits authority (rba)
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