Kenya, like many nations seeking to attain Vision 2030, is pursuing economic development through an industry based economic system. This has over the years led to significant changes in social and economic lifestyles.
According to Pauline Gathuri, a senior manager for Life Insurance with the Association of Kenya Insurers (AKI), Kenya is transitioning from a once traditional system of living to a modern capitalistic lifestyle and so there is an urgent need to aptly prepare ourselves for the inevitable change.
One area of life that has undergone a radical change is that of social security, particularly with regard to poverty in old age. In the traditional African society, social security systems were assured. These took the form of practices and social norms that ensured the elderly were taken care of by younger members of the society. The socio-economic changes are increasingly leading to a breakdown in traditional systems of old age security.
Fortunately, the capitalist economic system has brought with it other ways of ensuring old age security, the principal one being through membership in a retirement benefit scheme which provides payments to retirees in the form of pension or lump sum payments upon retirement.
A retirement benefit scheme can therefore be looked at as a form of insurance for which you pay premiums while you are working against the predictable risk of impoverishment later in life.
Here are some more reasons why you need to plan for retirement;
• Aging process is inevitable: As active as we may be today, there will come a time in life when we will have to retire. However our living expenses such as food, medical, housing, electricity and so on do not retire. Hence, saving in a retirement benefits scheme as early as possible, helps create the much needed income in retirement to cater for these expenses.
• Weakening of the family unit: It is a reality that parents may not depend on their children for their upkeep in old age due to breakdown in the traditional systems that provided old age security. Are you sure that your children will take care of you in your retirement?
• Improved Health: Advances in the medical field have translated to longer life expectancy. Hence, you shall need more money in retirement to cater for you and your dependents.
• Tax benefits: Saving in a retirement benefits scheme is one sure way of keeping your savings safe from the tax man. Contributions to the scheme are tax exempt as per the set limits and the investment return earned on this is also tax exempt.
• Disciplined saving: The plan provides a disciplined way of saving and the money is not readily available for withdrawal like money in a bank account.
It is therefore necessary for everyone in their 20’s, whether in the formal or informal sector, to plan for a comfortable retirement for by joining any of the three main retirement plans;
• Government Sponsored Arrangements: This is through the National Social Security Fund (NSSF), which is compulsory however, the benefits are so minimal to live on after retirement.
• Individual Pension Plans: Membership is open to all employed persons who are not in employer sponsored schemes and also people in self-employment.
Insurance companies are the main founders of Personal Pension Schemes and the appointed corporate trustees run the scheme as a Trust on behalf of the members. The schemes are registered by the Retirement Benefits Authority (RBA) and Kenya Revenue Authority (KRA) and enjoy all the benefits enjoyed by the Occupational (Employer) Retirement Benefit schemes.
• Employer Sponsored Schemes: These schemes are formed by the employers for the benefit of the employees. It is not compulsory for employers to establish pension schemes and many employers in Kenya have not set up retirement schemes. This means that the employees of such employers have no form of saving for their retirement.
Employer Sponsored Schemes can further be classified as Segregated Retirement schemes and Guaranteed Retirement schemes.
Segregated schemes are ideal for very huge funds running into billions of shillings which can be able to take advantage of the economies of scale in terms of investments and to be able to afford the investments costs. For example, a statement shows that a member has a retirement fund of two million at age 54 years but if the investment market goes haywire then the members’ retirement fund could be a much reduced amount of maybe one million because any drop in investment is directly borne by the member. On the other hand if the investment market performs well then this will increase the member’s retirement fund.
The latter scheme offers irrevocable guarantee of capital plus future returns, for instance, a statement shows that the member has a retirement fund of two million at age 54 years but even if the investment market goes haywire the member’s retirement fund of two million will be guaranteed against any reduction and will remain at two million. The total minimum available amount to the member will therefore be the two million plus the interest declared for that year. On the other hand if the investment market performs well then this will be reflected in the high interests that will be declared and passed on to the member. A member is therefore protected against market down turns and also reaps from the up-turns.
Read more here on the benefits of an insurance pension plan.