Pensions

When an employee retires, he no longer gets a salary, but his need for regular income continues. With continuous improvement in longevity, the economic problem of old age is now as serious as the calamity of premature death.

Group pension schemes provide for retirement benefits in the form of an annuity. Retirement benefits like Provident Fund and Gratuity are paid in lump sum which are often spent quickly or not invested prudently, as a result, an ex-employee could find him without regular income during his life in retirement. Group pension schemes provide an answer to this problem. The schemes can be set up on a contributory basis by the employees sharing a part of the contributions. Alternative, if the employees do not contribute, the whole of the contributions can be paid by the employer.

Benefits to the employers and employees;

Employer

• Contributions made to Approved Pension Funds are treated as business expenses for the purpose of determining tax liability. Hence, as per the income tax rules of Kenya, the employer’s contributions can be treated as a non-taxable expense, subject to a maximum total contribution towards the pension scheme of Kshs. 20,000.00 per or Kshs.240,000.00 per annum.
• Coverage under Group Pension Schemes also boasts employee’s morale.
• A good pension scheme attracts good, new staff and helps to reduce staff turnover, whilst reducing the need for charitable handouts on retirement.

Employee

• Assured regular income during retired life;
• The employer’s contribution will not be treated as extra benefit in the hands of employees.
• Tax – free build up of contributions till the date of retirement.

Financially, there’s a tax benefit to be gained by employees when contributing to a registered pension scheme.  The Kenya Revenue Authority appreciates employee’s attitude towards saving (via Pensions contributions) for the future by allowing the contribution to be treated as an income, free of P.A.Y.E. i.e. contributions are not taxed.