Why you are leaving money on the table by not contributing to a pension scheme

Imagine you want to help someone and you call them to your office. After they explain themselves, you open your wallet and give them 20,000 shillings. To your surprise, they take 14,000 leaving the rest on the table and walk out. How would that feel? You will be surprised to learn, Kenyans especially those in self employment, have been doing this monthly for a while now. How, you ask? We will get to that in a short while.

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?


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).


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;

Pension amount1,000,000Tax
Tax relief4 x 60,000240,000
Taxable amount760,000
On 1st 288,000288,000@ 10%28,800
Next 100,000100,000 @ 25%25,000
Over 388,000(760,000 – 388,000) = 372,000@30%111,600
Total paid to him(1,000,000-165,400)834,600

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.

Pension amount6,000,000Tax
Tax relief10x 60,000600,000
Taxable amount5,400,000
On 1st 288,000400,000@ 10%40,000
Next 400,000400,000 @ 15%60,000
Next 400,000 400,000@ 20%80,000
Next 400,000 400,000 @ 25%100,000
Over 1,600,000(5,400,000-1,600,000) @30%1,140,000
Total Tax1,420,000
Total paid to him3,000,000 – 520,0002,480,000

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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