Think of your retirement and start saving.
The evolution of the pension industry in Kenya has yielded an array of choices of funds for individuals seeking to build their retirement nest eggs. While many may know what retirement savings are, it is important to understand the various types of plans when you are trying to figure out which plan is best for your retirement requirements and goals.
Basically, a pension plan allows you to save part of your income now to an account for use as a source of income when you retire. You can choose to save individually or via an employer.
The main types of pension plans as defined by the Retirement Benefits Authority (RBA) are:
- Occupational pension schemes (which are either be Defined Benefit Plans or Defined Contribution Plans)
- Individual Pension Plans
Occupational Pension Plan
An occupational pension scheme generally refers to a pension plan established by an employer for the benefit of his/her employees. The scheme is only open to members of staff of the employer. These schemes take two forms namely defined benefit or defined contribution.
Defined Benefits Pension Schemes
In a defined benefit plan, retirement benefits are determined using a set formula that takes into consideration one’s salary, years of employment with the company, among other factors. Benefits are paid in lump sum or in installments by the company upon retirement. The employer guarantees that the employee will receive a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool.
In the past, no cash contributions were required to be transferred to a pool on a monthly basis, actuarial scientists computed the accumulated benefits owed to employees and the company carried them as liabilities in its balance sheet until an employee retired. The current practice is for the employers to fund the scheme with assets to ensure that the value of assets nearly matches the estimated liabilities. There are very few organizations today that operate defined benefit pension schemes.
Defined Contribution Pension Schemes
A defined contribution plan is a scheme in which member’s and employer’s contributions are paid in cash to a pension scheme. The contributions are invested, for example, in the financial market, and investment returns are credited to the individual’s accounts. Upon retirement, the member’s contributions over time together with accumulated returns are used to provide retirement benefits, sometimes through the purchase of an Income Drawdown Plan which then provides a regular income in retirement.
At retirement, the benefits you receive are dependent on how much you were contributing while in employment and the investment performance of the pension scheme during that period of time. The contribution is fixed by an agreement with your employer and membership is usually mandatory. For the employee, they may agree to pay a certain percentage of their salary into a pension, and the employer may agree to contribute a certain amount, but the benefits are not fixed in advance.
Personal or Individual Pension Plans
This is a private pension scheme in which an individual contributes part of his or her salary to a registered pension provider. In Individual Pension Plans (IPPS), the contributions are pooled and invested collectively and upon retirement, an individual has the option of making a lump sum withdrawal or periodic withdrawals. One can also join an Income Drawdown Plan.
An IPP is ideal for individuals without an employer-sponsored pension scheme, but are also open to all and have gained popularity due to their flexibility and affordability. The Zimele Guaranteed Pension Plan, for example, allows anybody to save any amount starting from Ksh. 100 at their own pace. With no requirement to save a fixed amount monthly, its ideal for young people, entrepreneurs or persons with irregular income.
Retirement should be something to look forward to but that is only the case if you are well prepared. While retirement saving options are ever-evolving, having a clue about how your pension works can definitely help make your retirement more worry-free.