By Evans Ongwae
You are employed, and already belong to a retirement benefits scheme to which you and your employer contribute monthly. Why, then, should you seek to contribute more to your pension fund?
First, consider your pension fund as a ‘pot’ that holds the income you will use when you retire. Wouldn’t you want to make this pot bigger to make your lifestyle during the sunset years more comfortable?
Maybe you just finished paying for your new car or house and now your net salary is bigger than it was a few years ago. Or, you’ve just earned a bonus you weren’t expecting. Wouldn’t you consider depositing a lump sum amount or some regular, monthly additional contributions into your fund?
Do you have savings or income to spare? Why not top up your pension fund?
Various surveys by the Retirement Benefit Authority (RBA) have found that a majority of Kenyans retire into poverty. Fine, workers will have saved in their retirement schemes. But, is the amount they save sufficient enough to take them through their sunset years? Will that amount be close to what they were earning before retiring? Will it cover health expenses? Will it cover daily living expenses, and probably an annual holiday?
Advances in medicine and technology are enabling people to live much longer after retirement.
It is also worth considering that a person’s medical bills will continue to increase the older he or she gets. So, people need to start planning for medical bills now.
There are a number of reasons to look forward to a bigger pension pot. Immediately you voluntarily increase your contribution, you enjoy tax relief – if you hadn’t hit your limit. Consider this: Retirement benefits laws give you tax relief for your monthly pension contribution of up to Ksh20,000. Supposing you contribute Ksh10,000 monthly to your pension fund. You have room to increase that amount.
Note that, if you contribute Ksh20,000 monthly, that amount is not taxed as part of your gross salary. The taxable amount from your pay is minus that amount. Simply, both your normal contributions as well as the additional contributions are considered for tax relief before your tax is calculated. This is a tax-efficient way of saving for your retirement.
Depending on the nature of your retirement scheme, you contribute a specific amount monthly and your employer matches that contribution or contributes a defined percentage.
You can, therefore, discuss with your employer that you want to increase your workplace pension contribution. If this means your employer also adding to your pot by the agreed percentage, it translates to a bigger retirement package for you. Maximise employer contribution and reap the reward in retirement.
Power of compounding
If you make higher contributions to your pension schemes many years before retirement, you will grow your eventual income by a bigger factor compared to doing so much later. This is because your funds will grow at a compounded rate of interest. The power of compounding is especially massive when a fund is built over a long time. A small amount saved every month results in a huge pay-out later.
Even if you have a few years left to retire, you still stand to gain by contributing additional amounts to your fund.
Financial experts advise that it is better to start saving at an early age, but it is never too late to start – even if you are already close to your retirement years – because every penny saved helps to cover your expenses.