Pension regulations in Kenya allow members of retirement funds who leave employment before attaining retirement to access 100 percent of their own contributions and 50 percent of employer contributions made on their behalf with interest.
Various studies show that in spite of the efforts being made by regulators and industry players to encourage higher preservation of retirement savings on exiting employment, individuals continue to withdraw their pension savings in form of cash lump sums way earlier than their retirement ages.
Apart from inadequate savings in the first place, the practice of premature access to retirement savings is one of the biggest mistakes one can make whenever an individual changes jobs.
Cashing your retirement saving each time one changes jobs is “like going on a long-distance journey and emptying the fuel tank at every stop” as quoted by Sundeep Raichura Zamara Group CEO on a number of occasions.
Regular saving at a sensible level over a reasonable period is needed to build a pension pot that will sustain one during sunset years. These savings belong to the older persons that we will become and prematurely cashing them severely impacts future financial well-being.
Here’s an example on the negative effects of taking your cash out early to your retirement pot.
If someone started working at 25 years and started a long-term savings towards retirement, assuming this person is saving Sh2,500 per month till retirement, that is 50 years without breaking into the vault. This person’s savings would accumulate to approximately Sh4,744,088 at retirement, assuming an annual net return of 12 percent.
However, if this person changes employment after 10 years and decides to cash out their savings for their own personal use and then starts saving afresh in their new employment, this person would retire with a pension pot of approximately Sh1,261,440, which is almost 25 percent of the pot at retirement if we had continued saving and had not started afresh.
It is deeply concerning how many people are pulling their cash from pension pots without seeking advice or guidance.
Many cite the hard economic environment to justify accessing their savings. But if it is hard enough to make ends meet when one is working, can we imagine how hard it might be when we no longer have any income and no savings to support us when we can no longer work in our old age?
Premature withdrawal and inadequate pension saving is one of the main reasons of old age poverty in Kenya.
Yet others believe they can manage their savings a lot better than professional pension managers. There are stories of many a well-intended business venture failing. Others succumb to speculative investing while others fall prey to betting and pyramid schemes and lose their pension savings. This depicts Kenya as a country of net consumers and not net savers.
Early cash withdrawal permanently reduces one’s retirement account balance. It could also trigger higher taxation on the amount as compared to the tax at retirement. Early exit can also make one miss out on the compounded interest one would have earned.
It is, therefore, imperative for the young generation changing jobs to move along with their pension savings or consolidate their pension to an individual pension plan instead of cashing out funds, hence diminishing old age saving. It is also worthwhile for retirees in provident funds to access their funds through annuities or income drawdown, which facilities monthly payment instead of accessing their funds in a single payment.
Most people in pension industries are advised to add their contributions (Additional Voluntary Contribution) over and above what they contribute to build up savings for retirement or in individual pension plans as they still have the energy to earn.
It is also significant for the government and investors to educate young people on the importance of early saving for their retirement.
This information remains scanty as most people lack basic knowledge and education on pension savings.
Most Kenyans perceive pension as one for old age but if that is so, then how would old people enjoy their savings without saving at a young age?
Retirement training should start immediately one is able to earn so that they are well equipped on how to manage their finances and promote healthy lifestyle. These skills are useful to retirees as well to enable them to plan for their lives outside employment life without ignorance.
They say knowledge is power. Without information, then there is no plan.
As much as there is freedom from the regulatory law in accessing pension monies, it is upon each individual to make a personal decision and commitment to safeguard their pension by saving for future.
The writer is Pension Administrator at Zamara Group.