Why You Should Start Saving for Retirement Early
If you’re in your 20s or 30s, retirement may feel like a lifetime away. But the truth is, securing your future starts now. One of the best ways to prepare is by contributing to a Retirement Benefit Scheme (RBS)—a long-term savings plan that not only grows your wealth but also comes with attractive tax incentives.
What is a Retirement Benefit Scheme?
A Retirement Benefit Scheme is a savings arrangement where members make regular contributions during their working life. Upon retirement, the accumulated contributions plus investment income are paid out as retirement benefits.
RBSs must be registered by the Retirement Benefits Authority (RBA). To enjoy tax exemption, they must also be registered or approved by the Commissioner of Domestic Taxes.
Key Tax Incentives in Retirement Benefit Schemes
1. Tax-Deductible Contributions
- Contributions to a registered RBS are tax deductible
- The allowable deduction is up to KES 20,000 per month or KES 240,000 annually
- This amount is excluded from your taxable income
Examples:
| Gross Monthly Income | Contribution to RBS | Taxable Income |
|---|---|---|
| KES 80,000 | KES 20,000 | KES 60,000 |
| KES 80,000 | KES 15,000 | KES 65,000 |
| KES 80,000 | KES 30,000 | KES 60,000* |
*Only KES 20,000 is deductible, even if the contribution exceeds that amount.
2. Tax-Free Investment Income
- Income earned from investments by a registered RBS is exempt from tax
- This allows the fund to grow without annual tax deductions, maximizing returns
3. No Tax on Fund Transfers
- Transferring savings between registered RBSs is not subject to tax
4. Tax-Free Withdrawal Thresholds
Withdrawals from a registered RBS are subject to pension withholding tax, but with generous exemptions:
- Lump Sum Withdrawals: First KES 600,000 is tax exempt
- Monthly Pension: First KES 25,000 per month or KES 300,000 annually is tax free
- Upon Employment Termination: First KES 60,000 per year of pensionable service is tax exempt
Withdrawals from unregistered RBSs are generally tax-exempt, since contributions and income were previously taxed.
Employer Contributions and Tax Relief
When an employer sets up an occupational pension scheme, they must apply for tax exemption. Once approved:
- Employee contributions are deducted from gross pay before tax is calculated
- This reduces the employee’s taxable income, offering immediate tax relief
Final Thoughts
Tax incentives in Retirement Benefit Schemes are designed to encourage Kenyans to save for retirement. Whether you are employed, self-employed, or running a business, joining a registered RBS is a smart way to grow your savings and reduce your tax burden.
Now is the best time to invest in your future—secure it with tax-smart retirement planning.
