Overview Schemes Registration
Schemes in Kenya are required under section 23 to apply for registration in order to be allowed to operate. The application for registration shall be made in a prescribed form. The Retirement Benefits Authority shall consider the application and proceed to register the scheme and forward to the applicant a certificate of registration.
Where the application is not acceptable the applicant will be notified in writing the reason(s) for refusal.
For more details on registration of a retirement benefit scheme refer to the relevant legislation (The Retirement Benefits (Occupational Retirement Benefit Schemes) Regulation, 2000 & The Retirement Benefits (Individual Retirement Benefit Schemes) Regulation, 2000.
Have you noticed that in Kenya today, our lives seem to take up some kind of cycle? After you are born, your parents go to the next engaging stage, which is to take care of this ‘bundle of joy’. Soon afterwards, they get down to paying your fees and that of your siblings.
It usually starts when you are around age 3 to 5 and they are between 20 to 40 years. This responsibility goes on until you complete college. But for them, it more or less looks like a lifetime. Soon after college, you get married, and start having children. And just like your parents before you, start paying for your offspring’s nursery, primary then secondary and college education… and so it goes. It’s like a vital, undeviating trap you cannot wriggle out of; unless of course you decide not to get married or have children or if you choose not to bother with your ageing parents.
Many responsible Kenyan parents do not actually get to enjoy their money as they would like to, because they don’t plan their money well. They tend to only invest in their children’s education and well-being to the exclusion of other urgent matters like saving, at the prime of their working life and continue to do so deep into retirement. At times, the burden of child rearing becomes so overwhelming for parents, that they are compelled to beseech their older children to help out.
The peril here is that your children are under no obligation to lend a hand, and are fully aware of this. Besides, some make it clear that that they are drawing them in a direction they do not wish to take, especially because they too, are bracing themselves for similar responsibilities. So as life gets chilly in this uncertain climate, you find yourself in a quagmire. You are forced to admit to yourself that you cannot brush off this tangle, try as you might. After all, in the end, you need contented children, you want to know you did your best and you want to meet society’s need; that is what everyone else seems to be doing. It’s the norm, in other words.
Take the case of Dominic, a high ranking civil servant who, like his contemporaries ensured he gave his children good education and a comfortable life. He dutifully did this until he retired. But his children were still not satisfied. His daughter asked him to pay for her master’s course after retirement; he agreed to do this. By the time he was through, he was destitute; in the real sense, but the process had not ended, he still had other children to care for, long after he retired.
Dominic tried to stay on in the city but rapidly realized he could no longer afford it. He moved to his rent free dilapidated house in the village, where there was no electricity, no water and no real friends. Regrettably, he quickly noticed that the villagers appeared confused that the man they had always revered was pitifully broke. And as if this was not tormenting enough, the children he had selflessly brought up, spent most of his income on, and were now gleefully working, were not willing to help. His pension was a pittance. He did not have any savings either. Dominic blamed this on his resolution to spend most of his earnings on the young ones at the peak of his life. It was an awful awakening, that everything he had worked so energetically for all these years suddenly seemed to have come to naught.
As you are well aware, this story is not exclusive to Dominic. It happens to the best of us. Is it time we changed our outlook and our saving trends? What was true twenty or even thirty years ago remains just as true today. Clearly, you need a paradigm shift if you are to make life better for yourself and for your employees and investors, in case you are running an organization.
The trend in Kenya has been that you go to school and then help your parents. But this drift is slowly changing and parents are beginning to understand that their children may no longer be able or willing to take care of them when they grow old for several reasons. Many people are taking note of the heavy burden they are placing on their children when they demand that they take care of them. There was an interesting story that featured in the media recently, where elderly people, confined in homes for the aged gave heart-rending tales about children who no longer visit them. Some narrated how they were taken to hospital and abandoned there by their children when they fell sick.
In this depressing story, these parents were pleading with their offspring to come visit them while they are still alive because they are so lonely and in unfamiliar surroundings. Others were just grateful that they were able to land there. For, despite the solitude, they were assured of a meal and company everyday. The lesson we should learn here is that the social fabric is quickly disintegrating and the children today are not likely to take care of their parents as it was in the old days. There is need to start making plans for retirement now, assuming the worst case scenario, that your children may not be in a position to take care of you at retirement. No matter what else you have to do with your money, make sure you are registered with a pension scheme where you are contributing every month. People must learn how to invest in financial institutions to be able to take care of themselves. If you are doing a personal business, explore your options and find out which method of saving best suits you.
There are many benefits you get when you join a pension scheme because they will always have a way of reminding you to save. These could include having an accountability partner who can help you save. There are also forced deductions: You can ask for a standing order system and suggest tentative dates when a certain amount of money can be drawn from your account by your bank and placed in a pension account; this will correspond with varying deposit dates. A pension scheme number will be given to you in advance; it is an account you may not be able to draw from because the idea will be to help you save. There are times you will receive reminders so you keep up your savings.
If you are close to retirement; ensure that you have a medical cover which will continue after you retire, since many insurance companies do not cover people after a specific age. This is usually after 65. So it will be good if you have this medical cover just before retirement; like six months prior. There are a number of insurance companies that are ready to give you this cover.
For a long time Kenyans could think of no other retirement fund except The National Social Security Fund. But today there are private sector alternatives that workers can, and should consider. So take your time to choose a good and reliable pension scheme.
Remember that life is unpredictable and many things can happen that are beyond our control. For that reason helps to do as much as you can to ensure that you prepare a safe, pleasant and stress free retirement. You owe it to yourself.
Taxation of retirement benefits schemes has been one of the most complicated and least understood concepts by most members of retirement benefits schemes. We take cognizance of the fact that this is a critical area since it affects the member’s benefits directly. In this respect we highlight below the various taxation structures that are applied in retirement benefits schemes;
Tax relief is extended at three levels for retirement schemes in Kenya. The tax exemption preference treatment is first given to the member’s contributions followed by the employer contributions in that order
1. Tax Exemptions on Contributions
The income tax regulations currently provide that Contributions up to 30% of salary or Kshs. 240,000 per annum on aggregate whichever is less is tax deductible. The effect of this treatment is a net saving on Pay As You Earn (PAYE) tax by contributing members of retirement schemes.
Consequently, when this deductions are done at payroll level and submitted to the scheme, the members accounts are split in the following four main accounts depending on the level of contributions by the members;
Employee tax exempt account- this relates to contributions made by the member that are below the Kshs.20,000.00 per month limit
Employer tax exempt account – this relates to contributions made by the employer in respect of the member that are below the Kshs.20,000.00 per month limit after netting off the employee tax exempt contributions.
Employee non tax-exempt account- this relates to contributions made by the member that are above the Kshs.20,000.00 per month limit after netting off the employee tax exempt contributions.
Employer non tax-exempt account- this relates to contributions made by the employer in respect of the member that are above the Kshs.20,000.00 per month limit after netting off the employer tax exempt contributions.
2. Tax Exemptions on Investment Income
The second level of tax exemptions is on investment income made on the contributions made to the scheme.
Income on contributions made to the scheme up to the level of Kshs.20,000.00 per month is exempt from taxation up to 100%. This means that contributions in the members accounts which falls under the tax exempt accounts is not taxed.
However, income on contributions in respect of the non-tax accounts is taxed at the rate of 30%. This tax is determined annually by the auditors and paid to KRA. This implies that the applicable rate of interest to the member’s accounts in non-tax exempt accounts is less than that applied to the tax exempt accounts.
3. Tax Exemptions on Benefits
The third and final level is on withdrawal: The benefits that accrue from tax exempt contributions and income will receive a certain level of tax relief and thereafter suffer taxation. The current preferential tax treatment for members who leave a retirement benefit scheme after fifteen years of service or those who retire after the age of 50 years or those who retire at any time on grounds of ill health is such that the first Kshs. 60,000 for every year of membership up to a maximum of Kshs 600,000 of lump sum payment is tax free. Any amount above the tax free amounts is taxed at wider bands of Kshs. 400,000 as follows:
First Kshs. 400,000 at 10%
Next Kshs. 400,000 at 15%
Next Kshs. 400,000 at 20%
Next Kshs. 400,000 at 25%
Amount above Kshs 1,600,000 at 30%
For those who terminate their membership in the scheme before the expiry of fifteen years, the tax free amount is Kshs. 60,000 for every year of membership up to a maximum of Kshs 600,000 . The amount above the tax free is taxed at the following graduating bands:
First Kshs. 121,968 at 10%
Next Kshs. 114,912 at 15%
Next Kshs. 114,912 at 20%
Next Kshs. 114,912 at 25%
Amounts above Kshs 466,704 at 30%
The benefits that accrue from non-exempt contributions and income do not suffer tax at the time of withdrawal from the scheme.
4. Member statements
The exempt contributions and non-exempt contributions are booked in the system under two different accounts to ensure that income distribution is applied differently as stated and at withdrawal the taxation is applied correctly. This necessitates the production of two different sets of figures on the member statements for those members whose total employee and employer contributions are in excess of Kshs. 20,000.00 to allow the member to track the contributions separately.
The income distributed to non-exempt account will be less tax at corporation rate of 30% and this is the reason the two accounts do not receive the same rate of income distribution.
The provisions of the Retirement Benefits Act and the Trust Deed and Rules provide that all Trustees shall (unless prevented by death or resignation) hold office for a period of three (3) years but shall be eligible for re-appointment by the Founder provided that the Founder may in its sole discretion remove any Founder-nominated Trustee before expiry of his term of office.
Below are requirements for Trustee Election:
1. Election of candidates – Eligibility conditions
A person is eligible for election as a member-nominated Trustee if;
He/she is a member of the Scheme.
Has never been disqualified to act as a trustee by the Retirement Benefits Authority.
Has never been declared bankrupt.
Has never been convicted of any crime relating to dishonesty.
Is of sound mind.
He/She will always be available to fulfill duties as a Trustee which includes attending Trustees meetings
2. Qualities and Responsibilities of a Trustee
To assist you in making your nominations we summarize below the qualities and responsibilities of a Trustee:
To act jointly with the other Trustees.
To understand and comply with the provisions of the Trust Deed and Rules.
To understand and oversee the implementation of appropriate investment strategies for the Fund.
To take part in the selection of competent service providers and oversee their performance.
To understand how to safeguard the schemes assets.
To act with impartiality in respect of all members and beneficiaries.
To understand how the scheme should be administered in accordance with the RBA Act.
To act with due care, diligence and good faith.
To understand the regulatory environment and oversee compliance with the regulations.
Most importantly, the Trustees must have a clear understanding of the goals of the Scheme and how they need to be achieved.
Nomination of Beneficiaries
Every Member of the scheme is required to complete a nomination of beneficiaries form in which he/she shall indicate the Nominated Beneficiary or Nominated Beneficiaries to whom he/she wishes the lump sum benefits payable in the event of his/her death to be paid. Such nomination of a Beneficiary together with any subsequent replacement thereto shall not be binding on the Trustees and shall be interpreted and applied by the Trustees in accordance with the provisions of the Retirement Benefits Act and the Regulations.
Provision of the Unclaimed Assets
Section 13 of the recently enacted Unclaimed Financial Assets Act provides that …‘assets held in a fiduciary capacity for the benefit of another are presumed abandoned unless the owner, within two years after they have become payable, increases or decreases the principal, accepts any payment in respect thereof or communicates concerning the assets.This reference makes a specific reference with a direct impact to the retirement benefits industry since benefits are held in trust by the fiduciaries for the beneficiaries.
Implications of Non-completion of the Nomination of Beneficiaries Form
Payment of death benefits to the unclaimed assets authority
Upon death, your death benefits may be paid to the Unclaimed Financial Assets Authority as outlined above. This may limit the ability of Trustees to immediately apply these benefits for the direct benefit of your eligible dependents in the scheme.
Un-necessary delays in processing of death benefits
Upon death of a member of the scheme, Trustees shall have to go an extra mile in validating and authenticating the eligibility of any benefit claims that shall arise from various dependents that may emerge. This process may be costly, untimely and may use up extra effort and resources.
Litigations amongst beneficiaries
Some member’s beneficiaries may contest the discretionary applicability of death benefits as determined by the Trustees resulting to legal recourse through the judicial process. This option is costly and time consuming and may have no tangible benefits to the aggrieved parties.
Appeal for nomination of beneficiaries
As Trustees of the scheme, we request that all members of the scheme who have not completed / updated their nomination of beneficiary’s forms are required to do so with immediate effect for their own benefit.
Forms can be obtained from the HR office or the Scheme Administrator (Liberty Pension Services Limited) on soft or hard copy upon request of the same. Clarifications on this issue can be channeled through the trustees or the scheme administrator.