Whether you are a member of an occupational or individual scheme, saving money in a pension plan is a sure way of guaranteeing your financial security, post-retirement. One major benefit of pension plans, aside from being a source of income in retirement, is that they are guaranteed a favorable tax treatment compared to other modes of savings. Additionally, pension plans also have short-term benefits in the form of easing one’s tax burden. However, to protect savings from tax, ensure that your pension plan is in a scheme that is registered by the Retirement Benefits Authority (RBA).
The focus of this article is on the taxation of pension benefits, which is determined by the time and mode of withdrawal.
Withdrawal of Pension Funds
When it comes to withdrawing funds from a pension plan, one can either withdraw the funds in full; also known as a Lump sum payment or receive the funds as regular payments over a period of time which is referred to as Annuity.
It is important to note that only the funds that were tax exempt, upon contribution, and the interest accrued are subject to tax upon withdrawal.
Withdrawal at Retirement
For those who withdraw pension funds at age of retirement (60 years), taxation is as follows:
- Lump Sum Payments
Lump sum amounts can be no more than a 1/4 in schemes where members do not contribute and 1/3 in schemes where they make contributions.
A tax relief of KES. 60,000 per year of pensionable service is granted up to a maximum of KES. 600,000. The remainder of this is then paid out as regular payment.
- Regular Payments
The first KES. 25,000 received is tax free. The rest is taxed as per the applicable rates:
- Pension Tax Bands
|Pension Bands||Annual Tax Rates|
|On the first KES. 400,000||10%|
|On the next KES. 400,000||15%|
|On the next KES. 400,000||20%|
|On the next KES. 400,000||25%|
|On any amount in excess of KES. 1,600,000||30%|
Withdrawal before Retirement
Upon termination of employment, a member can withdraw funds from a scheme with the first KES. 60,000 per year of pensionable service being tax free. The excess is then taxed according to the new individual tax bands.
Individual Income Tax Bands and applicable rates
|Tax Band||Rate of Tax|
|On the first KES. 24,000 per month or KES. 288,000 per annum||10%|
|On the next KES. 8,333 per month or KES. 100,000 per annum||25%|
|On all income amounts in excess of KES. 32,333 per month of KES. 388,000 per annum||30%|
Tax relief is an incentive put in place to help the productive labour force save more. Having knowledge on the taxation of pension benefits not only helps in the planning of your financial future but also in making certain decisions, for example, whether or not to withdraw your pension before or after retirement as well as the tax implications of doing so.