Everything You Need to Know About Pensions in Kenya

Sorting out your pension in Kenya can make the difference between an easy and hard retirement. Read our guide to learn everything you need to know, from the different plans available to accessing your pension once you reach retirement age.

What is a pension in Kenya?

A pension is a financial arrangement that provides individuals with income after they retire from active employment. It ensures that retired individuals have a steady source of income to support themselves, enabling them to maintain their quality of life.

The Kenyan pension system is categorized into two main schemes: the public (government) pension schemes and private pension schemes. The proportion that you get from each will be part of your retirement plan.

Why is it important to plan for retirement?

Having and creating a retirement plan is vital, as it helps to maintain and sustain your standard of living after retirement. Having a pension in place means you'll be able to cater for basic needs like food, housing, and medical expenses.

It also provides a safety net, as no full-time job means no insurance benefits. You need to start saving up for retirement as soon as you start working.

In this guide, we cover the basics of pension in Kenya so you can start thinking about how it fits into your retirement plan.

Who can save into a pension in Kenya?

Anyone who lives in Kenya and is above the age of 18 is eligible to save for retirement. Ideally you should have disposable income, run a business, be an employee or employ people.  Both the National Social Security Fund (NSSF) and MOBIKEZA (Online pension platform) are available for the formal and informal sectors.

What are the different plans available?

There are two main pensions schemes in Kenya.

The first is the occupational scheme. This is registered by both the Retirement Benefits Authority and Kenya Revenue Authority.

The second is the individual or personal pension schemes. These are for people working in the informal sector.

There are also a number of private insurance companies that offer pension schemes. They have different terms and conditions, which you can find on their websites.

How do I access my Pension in Kenya?

Depending on the pension scheme you're subscribing to, there are a number of ways to access your savings.

• Occupational scheme: employees receive their pension funds when they retire, resign, get terminated, move to another country, or when they're rendered unable to work due to medical issues.
• Personal scheme: funds can be accessed at any time - either partially or as a lump sum. It depends on the rules of the scheme you're registered with.

In cases of medical emergencies and death, your next of kin or named beneficiaries will have full access to the funds.

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How do I get paid my pension in Kenya?

Upon maturity, pension funds can be paid out in a lump sum or on a monthly basis, like a salary. The provident fund provides members with a cash lump sum and interest from their pension savings. When you retire you can also choose to take a third of the funds as a cash lump sum, and the other two-thirds on a monthly basis.

Is there a minimum pension contribution in Kenya?

Yes, there is a minimum pension payment in Kenya. This is primarily guided by the regulations set by the Retirement Benefits Authority (RBA). The minimum contributions toward pension schemes ensure that all members are adequately preparing for retirement.

Kenya’s minimum contribution requirements

For employees enrolled in an occupational pension scheme, the minimum contribution is usually defined by the scheme rules. It's often based on a percentage of the employee's salary.

The RBA (Retirement Benefits Authority of Kenya) recommends a minimum contribution of 5% from both the employer and employee, totaling 10% of monthly earnings. However, many employers choose to contribute higher percentages to provide better retirement benefits to their employees.

For those in the informal sector using individual pension schemes, contributions can vary significantly based on the individual’s capacity. There is often no enforced minimum however, regularly setting aside a specific amount, even if it is a small one, is encouraged to build up a substantial retirement fund.

Impact of minimum payments

Implementing a minimum pension payment helps to ensure that members accumulate enough savings for their retirement years, which is crucial for financial security and sustainability. Lower contributions can severely affect the final retirement benefit, leading many to experience financial insecurity during their golden years. 

For instance, if an individual only contributes the bare minimum over a significant period, they may find themselves unable to meet their basic living and medical expenses once they retire. This reality underscores the importance of planning adequately for retirement, which means not only meeting the minimum requirements – but often exceeding them when financially feasible.

Benefits of higher contributions

Choosing to make higher contributions, beyond the minimum guidelines, can significantly enhance your retirement savings. People who invest more in their pension funds often reap larger benefits in terms of both lump sum payouts and monthly annuities.

Higher contributions can also provide a buffer against inflation and unexpected financial emergencies. As the cost of living continues to rise, especially in urban areas of Kenya, having a robust pension fund becomes even more vital to maintain your standard of living.

What are the pension benefits in Kenya?

As noted above, pension funds are paid in a lump sum or on a monthly basis. The provident fund provides members with a cash lump sum and interest on their pension savings. When an individual enters retirement, they can access a third of the funds as a cash lump sum, with the remaining two-thirds distributed as a monthly pension payout.

One of the primary benefits of a pension scheme in Kenya is that it offers financial security during retirement. As individuals transition from regular employment income to a fixed pension income, having a reliable source of funds is crucial for meeting day-to-day expenses.

Pension schemes also protect against the risk of outliving your savings. With life expectancy on the rise, pensions ensure that retirees can receive a steady income for as long as they live, helping to mitigate the risks associated with longevity.

A third benefit is that contributions to an individual's pension scheme may be eligible for tax deductions under Kenya’s tax laws. This means that individuals can reduce their taxable income, allowing them to save more for retirement while benefitting from potential tax relief.

What's the difference between a benefit scheme and a contribution scheme?

Benefit schemes (or DB schemes)

Benefit schemes, sometimes known as a DB scheme, guarantees a specific payout upon retirement.

This amount is usually calculated based on a formula that considers factors such as the number of years of service and the employee's final salary. For instance, if the scheme promises a pension equivalent to 60% of the final salary after 30 years of service, a retiree can comfortably anticipate receiving that percentage regardless of market performance.

These schemes are typically employer-sponsored, meaning the employer bears the investment risk. If the pension fund does not perform well, the employer must ensure that the promised benefits are still paid out. This offers retirees a stable income provision, which can be especially crucial amidst the uncertainty of market fluctuations.

Contribution schemes

Contribution schemes pay out based on the amount contributed to the pension fund.

Both employees and employers contribute a certain percentage of the employee's salary into an individual account within the scheme. The total amount available upon retirement depends on the contributions made, and the investment returns generated over the years. This means that the final payout can vary significantly based on several factors, including market performance and the duration of contributions.

One advantage of contribution schemes is their flexibility. Employees can sometimes choose how aggressively their contributions are invested, allowing them to take on more or less risk depending on their individual preferences and retirement timeframes. This personalization can be appealing, particularly for younger workers who have more time to recover from market downturns.

What is a basic salary pension?

A basic salary pension is a type of retirement plan where pension benefits are calculated based on an employee’s basic salary and their years of service. 

This traditional system has been widely used in Kenya, especially among public servants. It is generally structured to provide retirees with a predictable income, allowing them to plan their finances effectively in retirement.

This is not the same everywhere. You can learn more about pension schemes in Zambia with Workpay.

How does a basic salary pension work?

In Kenya, a basic salary pension typically involves contributions from both the employer and the employee. The contributions are pooled into a central fund, which is then invested to generate returns over time. 

When an employee retires, their pension income is determined based on a formula that considers their average salary during their working life and the number of years they contributed to the pension scheme.

For example, a common formula used might look something like:

Pension = (Years of Service) x (Pensionable Salary) x (Accrued Benefits Rate)

Generally, the longer an employee stays with one employer, the more substantial their pension benefit will be upon retirement.

What is the mandatory retirement age in Kenya?

In Kenya, the mandatory retirement age is set at 60 years. This applies to both public and private sector employees, although variations may exist for specific roles or industries.

Get your employee pensions sorted with Workpay

Having a pension in Kenya is not that common, and many people are yet to have retirement plans. Knowing what to expect when you get a pension scheme is important.

As business owners and employers, now is the time to get your employees and yourself set up for the future. Read more on pensions and other related articles such as if statutory deductions offer any benefit and everything you need to know about PAYE.

Workpay is a HR and Payroll software company that offers time & attendance, payroll, human resource, leave, expenses and remote teams solutions to businesses across Africa.

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