Columnists

Role of tax incentives in securing financial freedom in retirement

Thursday September 28 2023

Pension trustees are not only focused on the ethical implications of their investments but also on achieving robust financial returns. PHOTO | SHUTTERSTOCK

As nations confront the looming challenge of ageing demographics and the subsequent demands on social welfare structures, the pivotal role of pension systems becomes ever clearer.

A multitude of countries proffer tax perks as a strategy to entice citizens to earmark funds for their sunset years.

These fiscal tactics aim to solidify long-term financial resilience and curb premature benefits withdrawal.

Tax incentives stand as fiscal leniencies extended by governments, aiming to bolster economic dynamism in diverse domains.

In Kenya, the spotlight on tax incentives concerning pension savings underscores the nation's strategic thrust. Through such provisions, Kenya envisages spurring retirement savings, thereby igniting investment and propelling economic ascendancy.

By trimming the tax overheads for qualifying individuals and entities, the country charts a path towards broader economic vitality.

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Contemplating retirement without ample savings sends shivers down many a spine. The uncertainty of savings withstanding the vicissitudes of time, inflationary pressures, and unforeseen health-related outlays can indeed be paralysing.

Grasping the nuance of these tax breaks can enlighten one's fiscal planning, ensuring that present endeavours pave the way for future financial tranquillity.

Moreover, discerning these tax perks can influence critical decisions, such as the ramifications of early pension liquidation.

Delving into Kenya's pension landscape reveals the EET paradigm. This framework liberally exempts both contributions and accruing investment yields from taxation.

Yet, it casts the net of taxation over benefits when they're drawn. Worth noting is the country's policy that renders all investment returns, earned by accredited schemes, tax-free – an incentive aiming to amplify benefit accruals and magnify reinvestment channels.

Rooted in the Income Tax Act, the tax provisions pertaining to pension contributions dictate that registered scheme contributions—capped at 30 percent of an employee's pay—are deductible, with a ceiling of Sh20,000 monthly or Sh240,000 annually.

Both these amounts and the investment returns remain untouched by tax. For instance, if one's monthly gross earning stands at Sh80,000, a maximum of Sh20,000 can be shielded from tax, rendering a taxable amount of Sh60,000.

Furthermore, the State views employer contributions as non-taxable expenditures, granting them a financial edge.

Yet, the journey towards an impeccable pension infrastructure is not without its challenges. Industry pioneers harbour aspirations, like enhanced tax exemptions for pension plans and amplified tax brackets for retirement benefit access, to name a few.

Translating these visions into policies can supercharge retirement savings, fostering national financial stockpiling and invigorating pension fund investments.

Governments, through tax benefits on pension reserves, nudge their populace towards financial sagacity. This encourages a disciplined savings regimen and induces citizens to prioritise their impending fiscal requirements.

Bolstered by tax levers, a thriving retirement savings ecosystem buttresses economic equanimity, minimising potential drains on public coffers in later years.

The writer is the executive director of CPF Financial Services.