How to Calculate Your Retirement Benefits in Kenya: A Comprehensive Guide

Planning for retirement is crucial, and understanding how your retirement benefits are calculated in Kenya is a key step in securing your financial future. This comprehensive guide breaks down the various pension schemes, their calculation methods, and the factors influencing your final retirement payout. Whether you’re contributing to the National Social Security Fund (NSSF), a private pension scheme, or a provident fund, this article will equip you with the knowledge to estimate your potential retirement income.

Understanding the Kenyan Retirement Landscape

Kenya’s retirement system is primarily built around these key pillars:

1. National Social Security Fund (NSSF): A mandatory, government-run scheme for all employees.
2. Occupational Retirement Benefit Schemes (Pension Schemes): Schemes set up by employers for their employees, also known as employer-sponsored schemes.
3. Individual Retirement Benefit Schemes (Personal Pension Plans): Voluntary schemes individuals can join.
4. Provident Funds: Similar to pension schemes, but usually allow lump-sum withdrawals.

Each of these schemes has different contribution rules and benefit calculation methods. Let’s explore each in detail.

1. Calculating NSSF Retirement Benefits

The NSSF is a mandatory scheme for all employees in Kenya, with contributions shared between the employee and the employer. The primary focus of NSSF is to provide a basic safety net. The benefits from the NSSF are typically lower than private schemes. It is important to note that recent changes to the NSSF Act have introduced a tiered system, but we will cover the most current calculation method.

Current NSSF Contribution and Calculation

The current NSSF contribution is a percentage of the employee’s gross monthly salary. The total monthly contribution is 12% of pensionable wages, with the employer paying 6% and the employee paying 6%. The maximum pensionable salary is currently set at 18,000 KES, meaning contributions are capped. If your gross salary is above 18,000 KES, contributions will be calculated on 18,000 KES.

Step-by-Step Calculation of NSSF Benefits:

The NSSF provides two main types of benefits:

1. Age Benefit: Paid when you reach the retirement age (currently 60 years, but is subject to change)
2. Withdrawal Benefit: If you have no other active contributions and are exiting the pension plan permanently.

Step 1: Calculate your monthly contributions:

If your gross salary is 18,000 KES or below:

• Employee contribution: 6% of your gross salary.
• Employer contribution: 6% of your gross salary.
• Total contribution: 12% of your gross salary

If your gross salary is above 18,000 KES:

• Employee contribution: 6% of 18,000 KES (Ksh.1,080)
• Employer contribution: 6% of 18,000 KES (Ksh.1,080)
• Total contribution: 12% of 18,000 KES (Ksh.2,160)

Step 2: Determine your total contributions throughout your working career:

Add up all of your monthly contributions for all the years you were actively contributing to the NSSF. To simplify, if you have had a gross salary of 18,000 or less for 25 years , your total contributions to the fund would be calculated as follows. Note that interest earned on the fund will be added later.

• Monthly Contribution (12%) = 0.12 * 18,000 = KSH 2,160

• Yearly Contribution (2,160 * 12) = KSH 25,920

• Total Contribution over 25 years = 25,920 * 25= KSH 648,000

If your gross salary is above 18,000 your total contributions over a similar period will be:

• Monthly Contribution (12%) = 0.12 * 18,000 = KSH 2,160

• Yearly Contribution (2,160 * 12) = KSH 25,920

• Total Contribution over 25 years = 25,920 * 25= KSH 648,000

Step 3: NSSF Interest and Final Benefit:

The total contribution sum will be added to interest earned over the years as determined by the NSSF management each year. This is important because it can greatly affect the final sum.

The NSSF then calculates a final amount that will be paid out. Currently, this is paid out as a lump sum, but in the future, the government may introduce pension payments and not a single payment.

Important Notes About NSSF:

• The NSSF benefits are not typically sufficient for a comfortable retirement. It serves more as a safety net.
• The age for retirement is currently 60, but can change in the future.
• You can only withdraw your benefits after the age of 50 or after meeting other withdrawal conditions
• There is a debate as to whether to convert the fund to a pension scheme which will see members receive monthly pension payments rather than a lump sum

2. Calculating Occupational Retirement Benefit Scheme Benefits (Pension Schemes)

Occupational retirement schemes, also known as employer-sponsored pension schemes, are common in Kenya. These schemes are more varied than the NSSF and offer more potential for higher retirement benefits. However, the way benefits are calculated is also complex.

Types of Occupational Schemes

There are two main types of occupational schemes:

1. Defined Benefit Scheme: These schemes promise a specific retirement benefit, usually a percentage of your final salary, often based on the number of years of service.
2. Defined Contribution Scheme: Benefits are based on the total contributions made to your account, plus investment returns.

Calculating Defined Benefit Scheme Benefits

In a defined benefit scheme, your retirement benefit is calculated according to a formula set out in the scheme rules. The most common formula is:

Retirement Benefit = (Final Average Salary x Accrual Rate x Years of Service)

Where:

• Final Average Salary: The average of your salary over a specified period near retirement (e.g., the last 3 or 5 years).
• Accrual Rate: The percentage of your final average salary you earn as a pension benefit for each year of service (e.g., 1.5% or 2%).
• Years of Service: The total number of years you have worked for that employer.

Example:

Let’s assume:

• Final average salary: 150,000 KES per month
• Accrual rate: 2% per year
• Years of service: 25 years

The calculation would be:

Retirement Benefit = 150,000 * 0.02 * 25 = 75,000 KES per month (as a pension)

This is a monthly pension. Often, the scheme will have provisions for a lump sum and monthly payments.

Calculating Defined Contribution Scheme Benefits

In a defined contribution scheme, your benefit is based on the contributions made to your individual account, plus any investment returns. The key components are:

• Employee Contributions: The percentage of your salary that you contribute to the scheme.
• Employer Contributions: The percentage of your salary that your employer contributes to the scheme.
• Investment Returns: The profits or losses made on the investment of your contributions.

Step-by-Step Calculation of Defined Contribution Benefits:

Step 1: Calculate your total contributions:

Add up all the employee and employer contributions over your entire period of membership in the scheme. Be sure to check your payslips or statements to see how much you were contributing each month. If these were not static you will need to add each period up. Let’s assume an example

• Monthly Employee Contribution = KES 3,000
• Monthly Employer Contribution = KES 3,000
• Total Monthly Contribution = KES 6,000
• Total Yearly Contribution = KES 72,000
• Total Contribution over 25 Years = KES 1,800,000

Step 2: Determine your investment returns:

The investment returns will vary depending on the performance of the scheme’s investments. This will be a compound rate over time. A scheme statement should give you the total amount accumulated over your membership, but this will vary. It is imperative to follow up with the scheme on how they calculate these earnings and where the contributions are invested.

Let’s assume an investment return of 7% each year on the total contributions each year. You can follow up with the scheme manager to get a better estimation of how this will compound.

The estimated return over 25 years will be complex, but for the sake of this exercise let’s assume your total contribution is worth KES 2,500,000 with compound earnings.

Step 3: Calculate the Retirement Benefit:

The total retirement benefit is your total contributions + the total earnings of your retirement funds.

In this example:

Retirement benefit = KES 2,500,000

This is usually a lump sum which you can use to then pay out a monthly pension. The pension income will depend on the chosen payment provider and current prevailing market interest rates.

Important Notes About Occupational Schemes:

• Check the specific rules and regulations of your scheme to understand the specific calculation methods for your scheme.
• The specific rules and regulations are the most important things to focus on.
• Your scheme may offer options such as a lump sum, monthly pension, or a combination of both.
• Defined contribution schemes are subject to investment risk; you may see fluctuations depending on the state of the markets.

3. Calculating Individual Retirement Benefit Scheme Benefits (Personal Pension Plans)

Individual retirement schemes are voluntary savings schemes that individuals can set up on their own. They function similarly to defined contribution schemes, meaning that the final benefit is determined by the contributions made and the investments returns. These are also sometimes known as personal pension plans.

Calculating Individual Retirement Scheme Benefits:

The calculation for personal pension plans is similar to that of defined contribution schemes. The key considerations are:

Step 1: Track Your Contributions:

Keep records of all your contributions, as these will be critical to understanding your total final payout. Add all of the contributions over the entire period of your membership. Let’s assume the following:

• Monthly contributions = KES 5,000
• Yearly contribution = KES 60,000
• Total Contributions over 25 years = KES 1,500,000

Step 2: Track Your Investment Returns:

The investment returns are crucial, and they can significantly impact your final benefit. As a rule of thumb, the earlier you start investing, the greater time your money has to earn compounding returns. Let’s assume your total funds plus the investment returns are KES 2,300,000

Step 3: Calculate Your Final Benefit:

The final benefit will be the sum of the contributions plus the investment returns. In this example, that is:

Retirement Benefit = KES 2,300,000

Again, this is a lump sum that can be used to generate monthly income using different annuity products offered by financial institutions.

Important Considerations:

• Personal pension plans give you greater flexibility and control over where your money is invested
• The investment returns are not guaranteed, so take time to understand the investment risk
• Choose a registered and reputable service provider

4. Calculating Provident Fund Benefits

Provident funds are similar to pension schemes, but typically offer more flexibility with withdrawals. They also operate as defined contribution schemes, but with added features. In most cases, there are specific conditions where you can access the funds before retirement, but usually, you will receive a lump sum amount.

Calculating Provident Fund Benefits:

The calculation is similar to a defined contribution scheme. The total of the contributions is added up and the investment return is added to get the final amount. You can also consult with the service provider to understand how much your contributions have gained over the period of membership.

Key Points:

• Provident funds typically allow for more flexible withdrawals before retirement compared to pension schemes
• The tax implications may be different from other retirement savings vehicles

Factors Affecting Your Retirement Benefits

Several factors influence the final amount of your retirement benefits:

• Salary: Higher salary usually leads to higher contributions.
• Years of Service: Longer working careers typically result in greater benefits.
• Contribution Rate: The percentage of your salary you and your employer contribute.
• Investment Performance: Returns on investments significantly influence benefits.
• Scheme Rules: Different schemes have different rules impacting the final benefit calculation.

Tips for Maximizing Your Retirement Benefits

To make the most of your retirement savings, consider these tips:

• Start Saving Early: Time is the greatest ally when it comes to compound interest.
• Contribute More: If possible, increase the amount you contribute to your scheme.
• Diversify Investments: Don’t put all your money in one place; diversify to mitigate risks and improve chances of returns.
• Stay Informed: Regularly check your scheme statements and understand your investment performance.
• Consult with a Financial Advisor: Get personalized advice to understand the different schemes and make informed choices.
• Track Your Progress: Keep a retirement tracker and set milestones, and adjust as needed

Conclusion

Calculating your retirement benefits in Kenya can seem complex but breaking down each scheme into smaller steps makes it more manageable. Understanding the various types of schemes, their contribution rules, and benefit calculation methods is essential for effective retirement planning. By taking these steps, regularly monitoring the fund, and making informed decisions, you can ensure a more secure and comfortable retirement. Start planning today for a better tomorrow.