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Are Private Pension Funds Right for Your Retirement in Kenya?

By February 29, 2024Blog

Retirement feels like a lifetime away when you’re 25 to 45 and rocking that “hustle hard” spirit in Kenya. But here’s the truth bomb: The choices you make today impact your future. 

While enjoying a warm sunset from your beautiful home in your golden years sounds amazing, affording such luxury without worries requires planning, and trust us, starting early is your secret weapon. 

The government has the NSSF fund that can help you do this at the same time the Insurance industry has private pension funds.  The major difference of the two is that you are in controls of the investments private pension fund unlike the NSSF Contributions. 

With the recent changes of the NSSF Contributions you cannow transfer part of your NSSF to a government issued notice that allows you to transfer your NSSF to a private pension fund. In this blog we will cover aspect you need to understand before you decide to make the move and why you need to do so. 

What are the recent changes on NSSF Contribution rates?

The new rates are based on a graduated system classified in tiers. This means the percentage you contribute depends on your gross monthly salary. You can read more on this from theHere’s a breakdown:

  • Tier 1: Applies to your pensionable earnings up to Kshs 6,000 of your salary. Both you and your employer contribute 6% each, making a total of 12%. 

Therefore, Kshs 360.00 for the individual and Kshs 360.00 for the employer will be the maximum monthly contributions for Tier 1 contributions. As a result, the maximum monthly Tier 1 contributions made in relation to an employee will not be greater than Kshs 720.00.

  • Tier 2: Applies to your pensionable earnings above Kshs 7,000, up to Kshs 36,000. Again, both you and your employer contribute 6% each, for a total of 12%. 

As a result, the maximum cumulative Tier 2 payments provided for an employee will not exceed Kshs 1,440.00 each month. 

Based on the the above calculations, the total remittance to NSSF for an employee shall be Kshs 2,160.00 per month, which includes Kshs 1,080.00 (360+720) individual contributions and Kshs 1,080.00 (360+720) employer contributions if the employee’s wage exceeds the UEL of 18,000 per month.

Private financial services companies have been given the green light to manage the tier 2 contributions for willing individuals and groups. 

What is Private Pension Funds and Their Key Benefits in Kenya

Insurance firms in Kenya often provide their customers with personal pension schemes, sometimes called retirement plans, so that they can save up a nest egg for when they’re older and nolonger working. 

These funds are invested to provide a steady stream of income for the plan member. Let’s take a look at what are some of the benefits of having a private pension fund in Kenya.

Why choose a private pension fund over other savings?

    1. Tax Benefits: You can keep more of your hard-earned cash today by contributing to a private pension fund, since your contributions are tax-deductible up to a certain level. On top of that, you receive a tax-free lump payment when you retire, so you can let loose without worrying about taxes eating into your fun.
    2. Higher Returns: When compared to the National Savings and Pension Fund (NSSF), private pension funds invest your contributions, providing you with access to a wider selection of options that may offer higher returns. This means that your money will work harder for you, year after year, to build up a larger nest egg for your future self.
  • More Control on Savings: While professionals manage your investments, a private pension fund enables you to stay informed about where every saved up coin goes, empowering you to take control of how you save up for your future. Plus, the regulated nature of these funds offers added security for your hard-earned cash

What Are The Different Types of Private Pension Funds?

Although the National Social Security Fund (NSSF) provides a strong foundation, private pension funds provide additional chances that are extremely valuable in order to ensure that you have a retirement that you deserve. To assist you in finding the one that is the best fit for you, let’s have a look at the several varieties that are available:

The Individual Retirement Benefit Schemes 

It is designed for individuals who are over the age of 18, regardless of whether or not they are employed.

With this retirement scheme, you are able to select the amount of your contribution as well as the investing strategy that you wish to engage in. This plan is ideal for individuals who are looking for personalized control over their retirement funds.

Pension Plans for Employees in the Workplace 

This is a benefit that is provided by employers to their employees as an additional perk. You and your employer each make a contribution to the savings you would like to have in the future. This plan offers employment security and the possibility of employer payments that are matched, making it an advantageous benefit.

Plans Provided By The Government

Kenyans can count on the National Social Security Fund to give them basic financial protection when they retire. These contributions are required of both companies and workers. But the rewards people get aren’t always enough to cover their lifestyle expenses once they retire.

How Can You Choose The Best Scheme For Your Retirement?

There are different kinds of private pension funds for people with different wants and ways of life. When making your choice, think about these things:

  • Flexibility with your income and contributions: Would you rather have full control over your contributions or the security of job matching?
  • Options for investments: Do you value personalized investment choices or do you like having your portfolios handled by professionals?
  • Fees and charges: To get the best returns, know how much each choice will cost you.
  • Benefits for taxes: Use the tax breaks that different plans offer.

Talking to a private pension fund advisor can help you sort through all of these choices and pick a plan that fits your retirement goals and budget perfectly. Dawit Insurance gives you a FREE consultation service where you can talk to one of our expert advisors and find out more about how you can use private pension funds to make money when you leave.

You can also visit our webpage on the NSSF deductions to have a self-paced read on how you can get started with investing for retirement through a private pension fund.