I spend everything I earn, is it wise to withdraw my pension to build a home?

Question: I am 37 years old. I am employed as a shopkeeper with a fixed basic salary of Sh10,000 per month. My employer provides me with free accommodation, valued at Sh3,000 and I have a daily meal allowance of Sh200.

When I hit the monthly sales target, I get an additional Sh2,000 bonus. I lost my first job due to the pandemic so I have to make do with what is available. My expenses average about Sh5,000 every month and I send my parents Sh2,000 every month. I cannot fully account for the rest of my income. I have a wife and two children between five and eight years old.

My intention is to save at least Sh3,000 every month to cater for their school fees and buy a small piece of land to settle my family before I am 45. An eighth currently costs about Sh1.5 million in Ngong. I also have some pension savings from my previous employer totalling Sh4.2 million. I would like to retire at 45 years.

If I have to choose between withdrawing 40 per cent to build a residential house or wait for my retirement, what choice is best and why?

Answer: From the facts shared, you have a basic pay of Sh10,000, a regular meal allowance of approximately Sh4,000, accommodation valued at Sh3,000 given in kind, and an occasional bonus of Sh2,000 based on performance.

 Your planned expenses take half of the basic pay, parental support consumes a further Sh2,000 monthly while your unplanned expenses sweep the balance of your basic pay, which comes to Sh3,000 and any bonuses earned.

At 37 years, you are in the sixth phase of your life (ages 36 to 42) where you are naturally expected to be investing while children are growing. You have asked for a specific decision on whether it would be wise to withdraw part of your pension. Well, this is not feasible within the present law governing pensions. 

It is also not clear whether you have determined the cost of constructing the home once you have purchased land or whether you have considered other alternative ways of acquiring a home, for example through affordable mortgages.

First and foremost, affordable mortgages are available in select Savings and Credit Cooperative Societies (Saccos) spread across the country and also in eight commercial banks. They are being offered for up to 25 years at interest rates less than 10 per cent.

The borrowing option is subject to your ability to pay. For example, if you borrow Sh500,000 on an affordable mortgage over a 10-year loan term, you will need about Sh6,300 per month to repay it. This implies that you will need to repay the loan over a longer period, therefore you cannot afford to retire at 45 years on your current income.

Pension law has been revised to allow you to access a loan using up to 60 percent of your pension as a guarantee. This could enable you to access a loan without requiring a deposit, however, the trustee to your pension fund must have changed the trust deed of the fund to allow use of funds to guarantee loans.

Also, you will need to manage the income of about Sh3,000 and the occasional bonuses of Sh2,000, which you cannot account for to generate savings and ability to service a loan.

 Your current income might not be adequate to support a borrowing of Sh1.5 million even over a 20-year loan term. Such a budget therefore will mean using part of your pension fund upon retirement at least 50 years of age towards putting up a home.

Early retirement before reaching 50 years imposes a very expensive taxation on the funds you withdraw, estimated at Sh1m, or Sh880,000 in withholding taxes (based on Sh4.2m) when you retire either earlier or at age 50 respectively.

The combined direct financial implications of retiring early and applying your pension fund towards a home will take away at least Sh2.5 million from your current fund of Sh4.2 million before you start the retirement journey. This is not a wise decision based on your current age, your inexperience in business where you could apply the fund to generate family income, the ages of your children, and their growing financial requirements for education.

You need to consider saving the excess income you are not accounting for, preferably through a Sacco, you can then take a loan to support your spouse to generate additional income to compliment your effort in the intervening period. Most Saccos will take monthly savings of as little as Sh1,000 to Sh3,000 monthly.  When this becomes real, you may then redirect the savings towards children's education.

Also, reconsider the location where you wish to put your home with a view to lowering your budget for both buying the plot and building the home. You should also visit one of the providers of affordable mortgages to find out what you will need to do to qualify for credit while you are still young. Borrowing a small amount looks quite feasible if you manage your current income well and work hard to earn your bonuses regularly.

 Mr Wameyo is a financial literacy and entrepreneurship coach at Financial Academy & Technologies. Do you have a personal finance inquiry you would like him to tackle? Reach him on [email protected].