Personal Finance

How can I use my pension to build lasting financial legacy?


Saving in a pension fund is one of the most tax-efficient ways to build wealth. PHOTO | SHUTTERSTOCK

Every human being wants to leave a legacy behind. For the most part, if you do a decent job at this, some of the signs would be a good turnout at your funeral, with a long list of achievements being read out by those that may have the chance to speak about you.

The make-up and quality of people attending the funeral would also speak volumes as to what heights one may have scaled when they were alive. The African way dictates that for the masses, this would be a time to not only mourn the hole left behind by your absence but to also celebrate your life and remember the good times shared.

Two states of mind

More quietly, however, nestled in different corners of the same proceedings, your dependents are in one of two states of mind.

The first one is a frantic state, who will take care of them now? How will school fees be paid? Under what roof will they live once these proceedings are done? And the most basic of worries is, what will they eat once the “festivities” are over.

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The second state is one filled with a sense of calm, knowing that they are well taken care of, and that surely, tomorrow the sun will rise. This in my opinion is the true measure of a rich legacy.

Succession planning

The first step in succession planning is to actually have something to leave behind. There are two ways of achieving this, either through windfalls or family wealth inheritances, or for most of us, through building a nest egg big enough over the years to take care of yourself and your immediate family in retirement, have some left behind for your children, and even some more for your children’s children if you are lucky.

The tested and trusted personal finance hacks followed diligently over your lifecycle should give you a good shot at securing your financial future and that of your family. You would have various investments all working together to ensure that you were financially independent.

Part of these investments would be your pension investments which will have accumulated over time and are designed to get you through the latter years of your life. Pension benefits apart from their traditional use can also be used effectively to pass on your wealth to your dependents. Here is how.

Pension benefits do not form part of your legal estate.

One’s estate is everything comprising the net worth of the individual, including all possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.

The value of your legal estate is particularly relevant in two scenarios; when an individual is in debt, or when an individual dies.

Typically banks and other creditors can claim in part or whole, the assets in your legal estate to settle any loans or credit you may have taken from them, should the value of the credit be more than one’s legal estate, then that would represent a wiping out of the legal estate in one fell swoop.

Pension benefits in this territory are not considered to be part of one’s legal estate and are thus protected from such actions, thereby guaranteeing one’s beneficiaries of the proceeds from the pension account. Indeed, pension benefits can only be paid to the individual saving for retirement or the beneficiaries that he or she would have nominated in case of death.

Trustee fiduciary duty.

Fiduciary duty involves actions taken in the best interests of another person or entity. In the case of pension funds, trustees are required by law to act in the best interest of the funds’ members and their beneficiaries. What this does is ensure that there is a party that is duty-bound by law to ensure that your beneficiaries or next of kin are well taken care of in the case of your demise.

An example of decisions made by trustees for the benefit of the next of kin of a fund member is the forming of trust funds within pension funds to take care of the expenses of minors as they arise. Such expenses include tuition fees, school materials and uniforms along with discretionary maintenance costs that are deemed necessary. The trustees also have a responsibility to ensure that such trust funds are not misused or embezzled.


Saving in a pension fund is one of the most tax-efficient ways to build wealth. In this territory, tax efficiency is achieved through various exemptions. The first is an exemption on contributions up to a certain limit, currently this is Sh240,000 per year. The next is an exemption on investment income during the lifetime of savings in the pension fund for the registered part of your savings. And the last is a combination of more forgiving tax bands at exit and further tax exemption on your registered benefits of up to Sh600,000 depending on length of service in the pension fund.

On retirement, any of the funds used to purchase post-retirement solutions i.e. annuity and income drawdown would be transferred to these environments free of any tax or fee.

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Once you begin drawing down on these funds the tax exemptions on access to money jumps up to Sh300,000 a year for as long as there are funds to draw down from. For annuities, this would be for the rest of your natural life, for income drawdown, this would be contingent on the availability of funds to drawdown. Should you pass on, the tax benefits being transferred would reflect the above depending on where you were in your lifecycle.

The pensions environment in Kenya is thus more than capable of being a tool for the transfer of wealth from you to your dependents in a safe, tax-efficient, and regulated manner. It should be one of the main ways you choose to save for the future, whether this future can be anticipated or not.

Leroy is a consultant on retirement solutions. | [email protected]