Why everyone needs a retirement benefits plan


A few years ago when I was in my final year of college, my classmates and I were obsessed with getting the dream job and how much our starting salaries would be. Several people were talking of starting salaries of up to Kshs. 250,000 or how they will not accept anything less than Kshs. 100,000. Need I remind you none of us had any work experience and the value of the Kenyan currency was better than it is today. No one at the time talked about a retirement benefits plan. Why would we? We were young and still had eternity before retiring.

I do not think anyone got a starting salary of a quarter of a million shillings. A few of my classmates struggled to get jobs. Others went into business. Those who were employed and saw the National Social Security Fund (NSSF) deductions on their payslips looked at it as robbery rather than as something that will help them in future. Some more were lucky to work in companies that had a retirement benefits scheme where deductions of up to 30% of one’s salary were made to the scheme. Can you imagine earning a gross salary of Kshs. 50,000 and Kshs 15,000 going to a retirement benefits scheme? We are never taught that it is advisable to contribute as much as we can to a retirement benefits plan (or pension if you like).

Start saving for your pension fund as soon as possible. Image from http://www.thestar.com/business/personal_finance/2013/02/07/cpp_5_things_you_need_to_know.html

Whether we are in business or employed, we tend to acquire a certain lifestyle. Assuming one is employed at age 25 earning a starting salary of Kshs. 30,000 per month. Let us also assume that the salary increment is 10% per year. These are modest estimates of course. At the time of employment, this person can only probably afford Kshs. 100 for lunch daily. After 10 years, this person will be earning about Kshs. 78,000. Safe to say that this person will now afford a decent lunch of Kshs. 250 daily. Another 10 years and the person now earns Kshs. 200,000. They can now afford much more. A bigger house, better schools for the children, a car and so on. Just before retirement, having worked about 35 years of their life, this person will be earning over Kshs. 750,000 a month. With this money, the person can afford decent vacations for their family amongst other good things in life. Then they retire and just like that, there is no salary.

If our friend had not been contributing to a retirement benefits scheme, then they will be doomed, especially if they were not saving and did not have any investments. They may be forced to rely on others who may not be able to afford their lifestyle of an income of Kshs. 750,000 per month. If they were contributing to NSSF, then they may get about Kshs. 1.5 million as benefits which will be the contributions and projected interest. Not much, but it would be better than nothing. On the other hand, if they contributed about 10% of their gross salary to a retirement benefits scheme, then at the time of retirement, they may have enough to maintain their lifestyle.

This example above just shows how important it is to start contributing to a retirement benefits plan. On average, one is supposed to live on 40% of his current income post retirement. Meaning someone who earns Kshs. 750,000 will need Kshs. 300,000 to survive during retirement.

There are four types of retirement benefits plans available in the country:

• Civil Service Pension Scheme mainly for civil servants;
• National Social Security Fund (NSSF);
• Occupational Schemes: Where a company has set up a scheme for the employees; and
• Individual Schemes: Set up by institutions (mainly insurance companies) for individuals.

What You Need To Know About Your Retirement Benefits Scheme

Less than 3.5 Million or about 15% of the country’s 23 Million workforce is covered by a pension plan. Out of this, slightly over 3 Million is covered by NSSF and Civil Service Pension Scheme. The two plans are however, not a sufficient means of saving for retirement since the contribution rates are very low. This means the occupational and individual schemes have covered less than 400,000 people or 11% of the people covered by a pension scheme in Kenya. Imagine, a country of 40 Million, only 400,000 are covered by reliable pension schemes.

The question everyone should be asking themselves is: Are you among the 3.5 Million Kenyans covered by a pension scheme? If you are not, then you should seriously think of getting a cover. If you are contributing to a pension scheme, then you need to ask yourself if you are only contributing to the Civil Service Pension Scheme or the NSSF alone. Majority of Kenyans only contribute to one of these two yet the two are not a sufficient means of saving for retirement. If you are employed, you need to join an occupational scheme or an individual scheme. For those who are self employed, there are various individual schemes that you can join.

Contributing to a pension schemes is not only beneficial to an individual, but also to the Government as the money contributed is invested in the economy helping the economy grow. However, having few people with pensions will in the long run make the country have many retirees depending on handouts from the Government, family and friends. This will increase the dependency ratio of the country thereby reducing the country’s GDP.

Everyone wants to live a good life in retirement. The best way to ensure that we get the life that we want is by joining a pension scheme early, and preferably NOW!

If you would like to find out more about pension schemes go to this link, give out your details and Association of Kenya Insurers will contact you.

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I am a former investment Analyst who has recently ventured into the business world as a young entrepreneur. In my free time, I use the pen as a sword to shape the world so I can feel how awesome it would have been if I were a writer.