Imagine finally retiring after 35 years of work, there is no more morning traffic and tight deadlines.
However, just as you begin this next chapter, your rent is due, your health insurance premiums are piling up, and your children still look to you for help. The one thing you need for rescue in that old age gap is a steady stream of income, one that you spent years ago building your dream house. Sounds familiar?
This is the dilemma many young Kenyans face today. The idea of using pension savings to buy property sounds smart, but is it the wisest route?
James Ratemo from the Retirement Benefits Authority (RBA) cautions young people against cashing in their future income just to own a house today.
"The purpose of a pension is that it’s like your salary when you have stopped working. You should plan to have property when you are still working and the funds should not come from your pension," he says.
What happens to your pension?
Mr Ratemo says there are three main formats of pension benefits in Kenya —the monthly annuities, provident funds and income drawdown.
“You commit to what we call monthly annuities and take it to a pension fund, to an insurance firm, then they pay you monthly until you die,” he explains.
This system, Mr Ratemo says, provides stability, which is almost like a monthly salary during your retirement. The provident fund, on the other hand, gives you a one-time lump sum payment.
“For example, if your pension savings are Sh10 million, you get the whole amount and it is up to you to decide what to do with your money,’’ he says.
Then there is the income drawdown, which provides flexibility. “You draw down the amounts, lump sums, the way you plan, but it must be a minimum of 10 years,” he says.
All three options, Mr Ratemo says, aim to give you an income once you're no longer employed. However, he adds that using that money early to buy land or build a house will undercut its purpose.
What about using your pension as mortgage security?
Mr Ratemo says Kenya’s retirement laws allow one to use up to 60 percent of their savings as security for a mortgage.
“If you fail to pay, it means the person who was given your mortgage can attach your 60 percent pension, but that’s the final recovery option,” he says.
However, he notes that very few young people have saved enough to qualify for significant mortgages.
“Imagine a house is going for Sh 6 million, and by then you have accumulated only Sh 2 million. It’s not enough. High-salaried people can do it, but they rarely use their pension since they already own houses.”
So when can you withdraw?
The benefit experts explain that you can only begin accessing your pension under specific circumstances. For instance, if you lose your job, you can withdraw a portion of what you have in the scheme.
“In most circumstances, it is advisable to start withdrawing if you have lost your job, but if you are moving to another job, it’s even advisable that you don’t access that money because you are still working and the money is meant for retirement,” he says.
Other exceptions he adds include critical illness, where up to 100 percent can be withdrawn, or when it comes to permanent migration, where you can take all your savings. Additionally, he says that if you have been a member for 20 years or more, exiting the scheme earns you the full amount tax-free.
Let your pension work for you.
The beauty of a pension plan lies in its tax incentives and compounding growth.
“Remember, investment income in a pension scheme is tax exempt, and up to Sh30,000 that you save per month is tax exempt. Any investment income that a pension scheme earns is tax exempt, which means that all the profit is ploughed back into individual accounts of the scheme members,” Mr Ratemo says.
That’s why, instead of using a pension to buy property, he encourages young people to increase voluntary contributions, especially if their employers are also contributing.
“If maybe your employer is deducting 7.5 per cent and you contribute 7.5 per cent, that’s 15 per cent. Maybe you decide now to contribute 15 percent even if the employer is contributing 7.5 — so that this 7.5 grows at a higher rate.”
Prioritise lifestyle stability over ownership
Mr Ratemo warns that the retirement phase brings its own challenges.
“You need to earn like 70 percent of your salary when you stop working so that you can maintain the same lifestyle. You can imagine now if you want to take that money again for a mortgage, to buy a house, to build a home, to take your children to school.”
If you’ve already lived 40 years paying rent, he asks, why not let your pension cash flow handle rent for the remainder of your years, instead of rushing to own a home in your 60s?
“Unless maybe you have saved for 30 years, it’s not a wise idea to start spending millions of money to build a home,” he says
What’s the ideal strategy for young people dreaming of homeownership?
“You can take a mortgage, but keep paying when you are strong and working. Take advantage of the affordable housing projects, take advantage and buy a property and build slowly without pressure so that by the time you retire, a home is not a priority,” he says.
Financial world speaks
Alfred Mathu, a financial expert, says the dream of owning a home is as powerful as the anxiety about growing old without financial security.
But should one ambition come at the cost of the other? The financial expert says it’s not a simple yes or no, but it’s a balance based on financial goals and discipline.
“Financial planning is a journey; you start by building an emergency fund, and once the threshold is at least six times your monthly financial requirements, you then progress to diversifying the scope.”
In other words, rushing into homeownership without laying the groundwork can derail your long-term stability.
The temptation to access pension funds may be strong, especially when the rent prices seem to be soaring and land appreciation looks like a quick win. But Mr Mathu cautions against using one investment to compromise another.
“I advise on balancing investment options, and therefore both options are okay depending on the agenda,” he says. “But a long-term contractual investment offers more than investment; there is life cover, disability and critical illness cover over and above the investment, and this is necessary in your medium-term investment.”
In terms of building wealth, there’s no one-size-fits-all approach. Mr Mathu says both property and pension can lead to financial independence if it's done right.
“Both are okay depending on the circumstances. They both present different risk profiles. However, the best idea is to diversify your scope of investments. Property investment may require a high initial lump sum, while a pension can be built through regular, disciplined contributions. You will need to understand your risk appetite, cash flow situations and align these to the investment options available.”
Still, raiding a pension to buy a home may not always be a smart move, particularly if it eats into your long-term cash flow.
“Again, this is dependent on many factors,” he says. “Does the purchase leave you with a debt or income? What kind of property? Income-generating or dead asset? For speculation or income-generating?”
The financial expert explains a more structured route for young investors looking to get into real estate without hurting their pension.
“Get into a disciplined contractual investment, term to align with the date you want to buy the property, purchase price and your savings ability. A contractual investment ensures discipline and provides coverage in the event of life assurance risks. You also enjoy guarantees and tax benefits. Contractual investments have flexibility.”
