Quote of the Week: “I’ve been held responsible for taxes I know nothing about.” James Brown.
They say the only thing certain about life is death and taxes. If you live long enough, you can add retirement to that list. Retirement is a certainty and just like taxes we don’t like to think about it. But we should.
The question is why should you think about them? Why should you think about something that takes your money away? Two reasons. First, saving in a registered retirement scheme helps you lower your tax burden. Second, you will get all your retirement savings back, plus returns.
Lower Your Tax Burden
You can reduce the amount of income tax you pay legally without reducing your income. This can be achieved if you are saving for retirement in a personal pension scheme licensed and regulated by the Retirement Benefits Authority (RBA).
As per the Income Tax Act, you are entitled to a tax relief of up to a maximum of Ksh.240,000 per annum or Ksh.20,000/- per month for amounts contributed to a registered pension scheme. This means that if your taxable income is Ksh.40,000 and you contribute Ksh. 5,000 to your pension plan, your taxable income will reduce to ksh.35,000. The lower the taxable income, the lower the PAYE.
Someone might still ask, why contribute the pension and I will still be taxed anyway? That money doesn’t end up in my pocket. This is not true. Unlike an insurance cover where you only get your money if there is a claim, your pension contributions accumulate over time and are all yours. And the money also earns investment returns over time. When you are at least 50 years old, you can access all your pension contributions together with the accrued gains. In case someone passes away, their next of kin will receive all your benefits.
By the way, when you retire at 65, all your income from your pension will be tax free.
Get a Pension Income
The unfortunate reality of the world is that you cannot work forever. First of all, nobody wants to work for their entire life. Even if you love your job, you will not have the energy to work in your golden years. At one point, you will have to take it slow, but you will still need money for your day to day activities. That’s why it’s important to save for old age today. It will ensure that you have a steady income to give you independence in old age.
[Read More: Don’t Play Catch Up With Retirement Savings]
Saving in a personal pension plan has other benefits in addition to ensuring that you have a steady income in your golden years. It can also help you lower your income tax. Open a Zimele Pension account today at www.zimele.co.ke/join with ksh.100.