you think it’s too early to start planning for retirement? Well, think again, writes NJOKI CHEGE
Retirement is probably the last thing on the minds of many hard working Kenyans. Not only because it seems light years away, but also because until recently, not many people ever talked about it. However, saving for retirement is as important as repaying that loan you took years ago. This is because your retirement savings will be your soft landing when you are not able to work or when you eventually retire. One sure thing is it’s never too late or too early to start planning for retirement. Take Eileen Agwata, an accounts manager at Brand Savvy (an advertising agency). She began saving for retirement three years ago while still in her mid 30s. Reason? “I just realised that I needed to have something to fall back on after retirement or in the event that I lose my job,” Eileen says. Although previous employers did not offer Eileen a retirement plan, she opted to start hers on an individual basis. Today, she is part of the 15 per cent of Kenyans saving for retirement, a worrying number given that saving for retirement is easy to start. A lot of people also view it as a foreign concept. Edward Odundo, the chief executive officer (CEO) of the Retirement Benefits Authority (RBA) notes that the culture of saving, particularly among the youth, has diminished, adding that Kenyans have to start saving for retirement as soon as they are self-reliant. “There may come a time when you are not be able to work either because of sickness, old age or loss of your job. If you will not have a pension reserve, you will become a burden to the community,” says Edward. As Edward explains, a retirement benefits plan does not only ensure one’s sustenance after retirement, but it also spurs the economic growth of a country. For instance, the current pension reserve in Kenya is Sh451 billion up from Sh40 billion since RBA was formed ten years ago. Fred Waswa, the managing director of Octagon Pensions, a retirement savings service provider, adds that your money could not be any safer than in a retirement savings account. “First, there is the tax advantage attached to any retirement savings plan. The Government could give you up to Sh20,000 per month tax free benefits, depending on how much you contribute,” explains Fred. Tax-free He continues: “Secondly, investment income earned by registered retirement benefit schemes is tax-free. This means you get full income from your dividends.” Simply put: If, for instance, you earn Sh20,000 and contribute Sh2,000 to a registered scheme, your PAYE income tax will be calculated on Sh18,000. Besides, depending on the state of the economy and the scheme you have joined, you are bound to benefit from the annual return of these schemes, some of which could go up to 45 per cent. According to Fred, this beats a normal savings account where the interest is taxed. A retirement savings plan is flexible, as there no fixed amounts; you can contribute depending on your ability and earnings. “The tax cuts are a big incentive for me. That is what attracted me to this scheme. I think it’s a good thing that the Government is trying to encourage more people to start saving for retirement,” says Eileen, who began by saving Sh10,000 monthly. As she advises, it is important to put aside some money for rainy days. “It should be a mandatory thing to do, just like it is mandatory to contribute to NSSF,”Eileen says. Raymond Madowo, an information technology specialist in his early 30s, is also saving for his retirement. “I started in September last year. I decided to start small. Every month I contribute Sh1,000 and I hope to increase this monthly contribution,” Raymond says. “Retirement saving is like a hydraulic system, whereby you use a little force to do a big job. It is better to start when you are young and energetic, rather than rush at the last minute where you will be required to save lumpsums for your future,” says Raymond. In spite of the fact that many Kenyans may not be aware of the need for retirement savings and the benefits accruing, there is also the not-so-rosy history of schemes. Previously, such schemes were abused by some employers who deducted amounts out of employees’ salaries yet failed to remit them. Upon retirement, many people were left aghast as they found themselves empty handed. Today things have changed and contributed pension funds do not just sit in the bank. However, it is vital to understand the structure of a pension plan to know where and how your money is being used to generate interest and benefits. Every pension scheme has three parties: The custodian (a bank that ensures your assets are safeguarded), an administrator (a company that keeps track of the contributions from members) and a fund manager who directs the purchase and sale of assets to generate more interest. Registration When you want to start saving for retirement, you will approach a company that offers retirement scheme services. “You will then be advised by a consultant at that company who will give you the benefits accrued to your savings plan. After that you will be required to fill forms and declare the source of your income (to counter money laundering). You will then be required to sign a deed of adherence, a contract between you and the trustees. From then on, it will be your choice how much and how often you want to save,” says Fred. In the event that the company offering you the retirement services collapses, then you will not have to worry about your money since your money is in the hands of the custodian (bank), and you will be able to follow it up. However, as Waswa asserts, it is important to ensure that the administrator is registered by RBA, the national retirement benefits regulator. According to the Retirement Benefits Act of 2009, no person shall act as a manager, custodian or administrator unless they are registered under the Act and hold a valid certificate of registration issued according to the provisions of that Act. Every year, RBA publishes a list of retirement benefit schemes that are registered by the authority. “If we realise that a scheme is experiencing financial problems, we immediately de-register it or not register it at all,” says Edward. So why is it that in spite of the great benefits attached to retirement saving plans, many small and medium-size enterprises are not interested in establishing retirement plans for their employees? “Most people don’t understand what retirement benefits are about. They don’t understand the need to have a separate arrangement to augment what is being contributed to NSSF because they think the money remitted there is enough to cushion an employee after retirement,” says Fred. He, however, encourages individuals to have their own retirement saving plans, even if their employers don’t offer such arrangements. There are some schemes that offer retirement saving plans that require one to save as low as Sh20 per day. Young people are especially encouraged to start saving for retirement as soon as they start working. The beauty of having an individual retirement savings plan lies in the fact that you can move with this package from one employer to another, and you have the power to add, reduce, stop or delay your contributions, depending on your pocket.