First, the numbers

It is estimated that there are 17.4 million Kenyans in employment with 2.9 million of them in formal employment and the rest in self and informal employment. Of that, only 3.2 million Kenyans are in a pension scheme of any sort, majority in employer occupational and umbrella schemes. That leaves a good number of the self employed without a formal way to save for their retirement and also not benefiting from the generous tax benefits therein. But what are these tax benefits?

Exercise

Open the KRA website, and go to the PAYE calculator. Let us assume our client James is earning 2,000,000 annually as a lawyer after all the expenses of running his firm. You will realise that without the contribution benefits, his PAYE will be 508,600.20. But if he contributes at the maximum tax allowed of 240,000 (as long as it does go over 240,000 or 30% of his annual income) his PAYE drops to 436,600.20. In short, he saves 72,000 per annum just by contributing to a registered pension scheme or 6,000 a month. The 20,000 per month or 240,000 annually is called registered funds. (Jargon. I know).

Retirement

Once a member attains retirement age, we get in touch to share the available options whether a lump sum payment, purchasing an annuity or income draw-down or even deferring the retirement if they are still in active employment.

Why would the government intentionally lose tax revenue?

The short answer is that the government loves you and wants you to be happy. Yes, really, I am serious.

But other than that, the government has information and data insights that many do not. For starters, the government can see the social-economic changes happening in the country. Things like rural-urban migration, people having fewer children (in case your kids were your retirement plan), old age poverty statistics, healthcare costs increase as people retire etc. And your government has given you this incentive to help you prepare for that time while you are still energetic and vibrant.

And it gets better

The income earned by these contributions is also not taxed. If this money is left with the bank, whatever income you earn as interest, you will lose between 10-15% as withholding tax. Not so with a registered pension scheme. If your 240,000 above earns you 20,000, now you have 260,000 untaxed. Sweet.

The question then becomes, why are you leaving this money at the table? Claim it, and let it pave your road to retirement.

Unless you try to withdraw it early!

If withdrawing your money early ( less than 50 years of age, less than 15 years in a scheme, or for any reason other than retirement due to ill health or disability, or death) the government will tax it. However, they will throw you a tax relief of 60,000 for every year you have been in the scheme. Let’s take 2 scenarios. Suppose our lawyer James, who is 35, from above, has accumulated 1,000,000 after 4 years and now intends to withdraw to take care of an emergency (he really shouldn’t). He will pay tax like this;

In the 4 years since he had contributed 720,000 ( 240,000 x 4) you can see he has still gotten a return despite the tax. However, he has squandered a golden chance to further this incentive. Another person with similar.

Unless you try to withdraw it early!

• You can make contributions of up to 20,000 per month before paying any tax, on income. If we annualise this to 240,000 a year and suppose you had an income of 3,000,000 with expenses of 1,000,000 shillings. At the time of filing your returns, once the operational expenses are deducted, you can also claim this benefit as long as you contribute to a registered pension scheme. The figure should not be more than 30% of your take home.

• The income derived above will not pay a withholding tax unlike with most other investment vehicles like SACCOs, unit trusts, dividends etc.

• At the moment of withdrawal, you get a tax relief of 60,000 per annum to a maximum of 600,000. For example, if you are withdrawing 1,500,000 after 6 years in a scheme, you will pay tax on 1,500,000-(60,000 x 6)360,000= 1,140,000. If you had waited more than 15 years for the same amount or are above 50 years in age, the 1,140,000 would qualify for a preferential tax band. If you are over 65, you should not pay any tax.

Why are we showing you all this? Because without a pension scheme, the 20,000 we contributed could be taxed before investing elsewhere and at prevailing tax rates, that is easily a 6,000 saved per month in tax. Before your money even starts growing, you are already saving 6,000. Add the interest given annually and you realize a pension scheme will soon have you on the way to a secure retirement.

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Old-age poverty simply put, is the inability to sustain your lifestyle when you get old and retire. In Kenya, there is a great problem when it comes to old-age poverty. It is estimated that about only 3% of elderly Kenyans receive a pension. Most Kenyans who are in retirement face this issue. The main cause of this is the widespread mentality that children are a retirement plan. In the African setup, many people still do not save up for retirement because they rely on their children to take care of them when they are old and retired. This creates a huge burden on the youth and in turn hinder them from saving for retirement, creating a cycle of generational poverty. However, there are a few things that can be done to prevent this. They are:

Save for your retirement by joining a retirement scheme

The first thing you should do is join a retirement scheme. This will help you not only to grow your savings but also to secure your financial future. This should be done as soon as you start earning an income regardless of whether you are employed or self-employed. You can join the Mwavuli Individual Pension Plan which allows you to save for retirement while earning interest. Alternatively, you can talk to your employer and they can join the Mwavuli Pension Fund which will help you and your coworkers to save for retirement. Most Kenyans work in the informal sector and own their businesses but do not save with the excuse that they have nothing to save. But with the Mwavuli Individual Pension Plan, you can save as low as Kshs. 1,000 per month and secure your financial future.

Ensure that you clear your debts before retiring

Debt has brought many retirees to their knees. When taking on debt, it is wise to have a proper plan in place of how you are going to repay it and how long it is going to take. Before deciding to retire, you should have cleared your debts as they will torment you and you may end up selling off your assets and spending all your retirement savings paying them off.

Acquire a permanently owned dwelling for yourself

Paying rent in retirement could as well cause financial strain because it is a recurring monthly expense. Acquiring a farm, house or apartment puts you in a better position. You can save up while young and purchase some real estate either in the countryside or in the city depending on your preference and financial muscle. Some people when retired, choose to spend part of their retirement savings to purchase a house or apartment. However, if it is possible to acquire one while still working, that would be more ideal.

Invest in assets that will give you passive income

Having a passive income while in retirement is ideal as it supplements your pension. To maintain your current lifestyle even in retirement, it is estimated that you need a minimum of 80% of your current monthly income. Depending on how much you save each month and the percentage growth of your retirement savings, you may find that your monthly pension may not suffice especially if you do not save as much. Passive income can be from rental houses you own or from investments in financial instruments like stocks, bonds, REITS among others. It is possible to calculate how much you need to save each month to reach your retirement goal amount. You can reach out to us and get professional advice on this.

Have a post-retirement medical plan

Another thing that leads to old-age poverty is medical bills. In retirement, because of old age, people fall ill very often. The cost of quality healthcare in Kenya is very high hence medical bills can easily lead to poverty in the blink of an eye. Having a post-retirement medical insurance plan solves this problem.

Now that you are aware of what old-age poverty is and how to prevent it, it is up to you to secure your financial future. Share what you have learnt with your family and friends and let us end the cycle of old-age poverty in Kenya. For more information and guidance regarding all retirement matters, you can reach us at Mwavuli through the contacts below.

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You may be wondering why it is necessary to develop a saving culture. Well, some of the reasons include;

Where do you start?

Now that you know why saving is important, you may be wondering how exactly to develop a saving culture. Where do you start? One thing for sure is that forming a saving culture is not easy as it requires determination and consistency. However, here are some simple steps that you can follow to help you create a saving culture;

Step 1: Assess your fixed monthly expenditure

These are expenses that are a must every month such as rent/mortgage, food and shopping, transport/fuel, electric bill and water bill among others. Write them down in a book or on an excel sheet alongside rough estimates of how much these expenses are.

Step 2: Record your daily expenses through an app

The second step is recording your daily expenses preferably on an app. There are many personal financial management apps like Finance PM that are free and easy to use. The reason for using an app is so that you can automatically generate reports which will help you identify where exactly your money goes each month. Do this for about three months so that you can take note of your spending habits.

Step 3: Evaluate which expenses to cut on

The next step is cutting on unnecessary expenses. Using the data you have from the app that you chose earlier, you will see what you have been spending on. Once you analyze these expenditures critically and objectively, you will notice items that you can do without or you can cut down on.

Most of these items are luxury or leisure items that you don’t necessarily need. You should keep in mind that saving means foregoing some items.

Step 4: Create a saving goal

The next step is creating a goal. What exactly are you saving for? How much does it cost? Basically, it is writing down how much you need, by when and for what. If possible, you can create a simple vision board with pictures of what you would like to achieve and place it somewhere you will be able to see it every morning. This will help you visualize and keep you focused on the goal spending first.

Step 5: Save first then spend

A key thing to note when saving is that you don’t save what is left but spend what is left after saving. Saving comes first before spending. You should keep in mind that what you are earning is what you get after all statutory deductions and savings have been removed. If you are saving for retirement through an employee pension fund, it is usually deducted from your gross income hence it is easy. However, if it is through an individual pension plan, you may also want to set it up, in the same way, to make it easier.

To make it easier to save, you can request a standing order with your bank such that a certain amount is transferred to your retirement savings account and another amount to your general savings account each month. This will eliminate the temptation of spending first. Matters that need money are guaranteed to always come up but either way, do not dip into your savings as it is a slippery slope.

Step 6: Get an accountability partner

Having someone who you can be accountable to regarding your savings is important because they will help you maintain your focus. This can be your spouse, friend or even a family member.

Step 7: Monitor your progress

Lastly, you need to monitor your progress through milestones. For example, if you are saving up to buy a car in the next two years, you can check every four months whether you are on track or not. This is important because it will inform you whether you need to save more or add on an extra income stream to help you get there faster.

With this, you are well on your way to achieving great things. Remember that inculcating a saving culture is a long journey and it begins with one step. The earlier you begin, the more you can achieve. It is also important to inculcate this saving culture in our future generations. Start teaching children at a young age, the importance of saving and lead by example.

To learn more about how to save for your future and earn interest with Mwavuli, reach out to us.

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Location of your current property

If you currently own a home, it may be difficult to move because it would mean selling it. You may already have an attachment to the home and have invested a lot in it. This is the reason why most people reside in the same place that they have lived in for many years. Owning a home as well means that you do not pay rent which is a plus as it reduces your monthly costs. If you do not own a home yet, you should consider your retirement when choosing a location.

Cost of living

Different places have different costs of living. For example, those who live in a city find that they spend more each day on necessities such as food, water, rent among other things than those who live upcountry.

Environmental quality

The quality of the environment varies as well with the location. The cities tend to be way more polluted than areas away from the city. Air pollution, noise pollution, water impurity and congestion are some of the characteristics of the cities while the inverse applies to areas further from the cities. This is mainly due to an influx of motor vehicles, factories and overpopulation.

Access to quality healthcare

In Kenya, the concentration of quality healthcare facilities is in cities especially the capital city, Nairobi. Though there has been some improvement over the years, we are yet to have easy access to quality healthcare for all. Having this in mind is important as well when choosing a location for your retirement years.

Proximity to friends and family

Your proximity to your friends and family is important as well. In retirement, you have a lot of free time. Spending this free time on your own can be lonely and cause depression. Maintaining a close relationship with your loved ones is important for your mental health. Your partner may be living with you but having time with your friends and other family members is equally important.

Your hobbies

Your pastime activities may as well influence your choice of location. For example, if you spend a lot of time golfing, you may find that moving far away from any golf clubs may not work best for you. If your hobby is farming then you may find that living on a farm would work best for you. Maintaining your hobbies and doing what makes you feel relaxed and happy is important even in retirement. These activities are important as they help keep the mind active.

All these factors are best considered together to see the big picture. Some factors may seem to weigh more than others depending on the individual. Knowing what works best for you will assist in choosing the right retirement location for you.

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Keeping busy in retirement is very important. The main reason for this is to safeguard your mental health. When we reach retirement age, we are more prone to mental health problems such as depression, Alzheimer’s disease, anxiety, dementia, sleep disorders among others. Keeping the mind active during this time helps reduce the risk of such ailments.

Depending on one’s interests, here are a few things that can keep you active in retirement:

Physical fitness

From cycling to water aerobics, swimming, jogging and Zumba. There are many fun ways to keep fit during retirement. Keeping fit keeps your body active, healthy and in shape.

Mental fitness

As earlier mentioned, mental fitness is important. Some fun activities that keep the mind active are; playing chess, solving puzzles, crosswords, Sudoku and engaging in in-depth conversations. It is important to do at least one activity a day that stimulates the mind.

Mentoring

You can coach younger ones in your field of work or even better, be a life coach to someone. This keeps you active as well as helps shape younger minds.
Volunteering – Giving back to society is a good way to keep busy in retirement. There are many places that are constantly looking for volunteers to assist in different activities.

Write a book

Yes, you may decide to write a book! It could be about your life experiences or even fictional. During retirement, you’ll have a lot of time to do this.
Art – From handcrafts to painting to drawing or even photography, when you retire, you may discover hidden talents you never knew you had.

Gardening

Greenery can be very therapeutic. Tending to a garden can be a great way to spend your retirement time while also producing your own healthy and organic foods.

Read more books

Reading can take you to places you’ve never been. It activates your spirit of adventure and imagination. You can as well learn a lot from reading.

Music and dance

Listening to music can bring back good memories. Dancing has been proven to raise your happiness hormones as well. You may also consider learning to play an instrument. As long as you have the passion, it is never too late to start.

Learn culinary arts

You may also decide to take up cooking and baking classes and learn how to make great dishes for yourself as well as your family.

Spend more time with family

During your active working years, you may find that you don’t spend as much time with family as you would like. When you retire, you will have ample time to spend with your spouse, children as well as grandchildren.

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Let’s take a closer look at the different aspects you should consider when planning for retirement.

Financial well-being

The number one aspect that many focus on is financial because everybody wishes to be financially independent in their retirement years. To ensure this, starting your contributions as early as possible is very important. The earlier you start, the more you will have when you get to the age of retiring. One can begin saving for retirement as early as the age of 18.

Most employed Kenyans start thinking about their retirement plan from around 35 while most self-employed Kenyans think about their retirement plan very late in their years or not at all. Whether employed or self-employed, you should have a plan in place. Think of it as looking out for your future self.

Physical well-being

The second aspect is physical. Physical fitness determines your quality of life in retirement. Most of the diseases in old age are lifestyle diseases which can be avoided by having a proper diet and an active routine which continues even in retirement. Another aspect of physical well-being to consider is access to quality healthcare in retirement. One thing to consider when making your retirement plan is how you shall continue paying for your health insurance premiums in retirement.

Social well-being

Your social well-being in retirement is influenced by how you currently relate with your family members, colleagues, as well as friends. Forming closer bonds with your social circle is crucial. Research reveals that people with closer ties to their friends and family have a better quality of life in retirement and a longer life expectancy. The reason is that they can share their stresses in life hence living an almost stress-free life.

Mental well-being

Regarding your mental health in retirement, having an active life even in old age reduces the chances of getting mental illnesses such as dementia, Alzheimer’s and depression. There are fun ways to keep your mind active like playing games, solving puzzles, drawing, listening to music and many others.

The key takeaways from this are:

1. Join a pension scheme as early as possible.
2. You can join a pension scheme regardless of whether you are employed or self-employed.
3. Factor in your medical insurance when making your retirement plan.
4. Keep physically fit.
5. Cherish and maintain your social connections.
6. Keep your mind active.

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