Once you have a solid retirement plan in place, the next step is to get an individual pension plan. An individual pension plan (IPP) is a retirement saving and investment account for individuals. It’s usually a one-member account that allows you to save and plan for your retirement. 

In Kenya, several firms offer retirement savings plans, including individual pension plans. What’s important to note is that any firms that offer you a pension plan need to be registered with the Retirement Benefits Authority (RBA), which is the industry regulator.

Types of Individual Pension Schemes

Pension Fund 

With a pension fund, you cannot have access to all the funds, even in retirement. Once you hit retirement age, you can only withdraw a third (1/3) of your pension in a lump sum. The remaining two-thirds (2/3) goes towards purchasing an annuity or an income drawdown.

An income drawdown fund allows you to regularly access your retirement benefits, like a monthly income, while still investing the balance. Most firms have a minimum duration of 10 years from the date the drawdown commences. After 10 years, you can continue with the drawdown, purchase an annuity, or withdraw the funds in a lump sum.

On the other hand, an annuity is a form of insurance policy that regularly pays a guaranteed income to the beneficiary for a fixed period or until death.

Provident Fund

A provident fund will pay you a lump sum of your retirement contributions when you reach retirement age. One of the problems with the provident fund is some people tend to spend the money wastefully. If you opt for a provident fund, ensure you have spending or budget plan for the funds. You can also purchase an annuity or a drawdown with the funds. 

Benefits of an Individual Pension Plan 

I have realized that the majority of us never think about holding an individual pension plan. For instance, when I had pension benefits when employed, I never made extra contributions (in retrospect, I wish I did). But it dawned on me that I needed a personal pension after leaving because most of my savings were geared towards short-term or long-term goals.

Also, I needed to transfer my pension from the company’s scheme to a personal plan. My point is, even if you are a beneficiary of an employer’s pension scheme, you should probably consider having a personal pension plan. And I will tell you why;

Reducing Income Tax Liability 

No one is a fan of paying taxes, but there are legal ways to reduce your income tax liabilities. One of those ways is contributing to a registered pension scheme. This is important, not just for the employed but for anyone with any source of income. As long as you are reporting income to KRA, you can reduce your income tax at the end of the year by having a pension plan. 

As mentioned in the retirement planning article, a monthly pension contribution of up to Ksh. 20,000 (Ksh. 240,000 pa), 30% of monthly income, or your actual pension contribution, whichever is less, is tax-deductible. 

If we work with Ksh. 10,000.00 monthly contribution, that’s about Ksh. 120,000.00 per year tax exemption. If your gross annual income is Ksh. 600,000 (Ksh. 50,000.00) only Ksh. 480,000.00 is subjected to tax. Using the current PAYE rates, your income tax will be Ksh. 28,798.20 compared to Ksh. 52,397.40 of an individual without a pension contribution.

In addition to this, the return you earn from retirement savings is also tax-exempt. 

Compounding Interest

The power of compounding interest: the earlier you start saving, the longer you have to save and earn more returns. Also, the more you save, the more return you earn by the time you go on retirement.

You can use the calculator at the bottom of this post and see how various contributions and time horizons affect your retirement savings. 

Flexible Contributions 

Individual pension plans have flexible contributions, which allows you to contribute according to your ability. You can also send your contributions through mobile money, cheque, or as a direct debit from your bank. You can also have a deduction from your salary where your employer remits the funds to the pension scheme on your behalf. 

Portable 

An individual pension plan is portable and is not usually affected by your employment status. In fact, it helps you consolidate your pension contributions in one account each time you leave employment. While you might not access your employer contributions, you can always transfer that portion to your individual pension account for easy management of your retirement savings portfolio. 

Guaranteed Return

Not only is your capital guaranteed, but most firms (insurance firms with IPP) will also guarantee you a minimum rate of return regardless of the performance. Most have a minimum rate of about 4%.  

Collateral for Mortgage 

You are also allowed to back your mortgage using 60% of your retirement contributions. That means in case you need a mortgage to purchase or construct a house, you can use about 60% of your accumulated pension fund as collateral for the mortgage. 

Tax-free Withdrawal Benefit

Currently, you can withdrawal up to Ksh. 60,000 for every year you’ve been a member of the pension plan, up to a maximum of Ksh. 600,000.00. This means that any lump sum withdrawal from your pension plan within this range is tax-free.

What to Think About

When approaching any firm to purchase any individual pension plane, it’s good to think about:

Minimum Return 

What is the minimum guaranteed return from the firm? This is the return that the firm guarantees you, regardless of how the market or the firm performs.  

Past Performance 

Request details regarding the firm’s past performance and see how much return members have been earning previously. An analysis of the past 10 years will show you how the fund performs in various market states. Also, compare this information with that of other firms before settling on any. 

Fees and commissions

Does the firm charge any fees or commission, like management fee for the fund, and how much? Remember that higher fees and commissions will reduce your return. Some firms have no administrative fee for individual pension plans, but you need to confirm before purchasing the plan. 

Accessibility 

How easy is it to access your portfolio or statement? One rule about money and investments, you need to be on top of things, always. Whatever firm you settle for, ensure you have easy accessibility to your retirement portfolio. This makes it easy for you to track your progress. 

I have seen some companies already have mobile apps or online access, allowing you unlimited access to your retirement account. 

The bottom line is retirement is guaranteed, and the sooner you plan for it and start saving, the better you will be. You might also live longer than you expect, and a few saved funds in a pension scheme will come in hand at this time. If you have not started saving for retirement, it’s time you did it.