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Saving for pension path to happy old age

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Despite the gains in the pension industry, many Kenyans still do not feel they need retirement saving.

Industry statistics indicate that only 15 per cent of Kenyans are doing it.

Save for mandatory savings plans with the employer, many view such an undertaking as a secondary (even tertiary) requirement.

Who can blame them? The huge demands placed on the pockets of many leave very little for savings, let alone retirement saving, what with an ever-increasing cost of living! But we need to prioritise retirement saving as we do daily needs.

A simple and time-tested way of growing one’s investment is by using the law of compounding.

Compound interest is the addition of interest to the principal sum of a deposit or investment — in other words, interest on interest.

That means the interest you earn on the next period is added onto the principal amount and accumulated interest.

If you invest a shilling and it earns another after one year, in year two, interest will be applied on two shillings instead of the initial principal of one shilling — and so on, until you have a substantial investment over time.

For instance, an investment of Sh500 can be doubled in 10 years at the effective rate of interest of seven per cent if placed in a fixed deposit.

A simpler option for most people would be to join the mandatory savings plan offered by most employers.

Since pension investments are long-term in nature, the interest credited in the member’s account every year continues earning interest on interest for as long as the member remains in the scheme.

It is further boosted by regular contributions from the member.

The flexibility in such schemes allows a member to access their savings when changing jobs.

People should however know the purpose for which they are saving to allow them realise the benefits of compounded interest.

But accessing benefits when changing jobs is only useful if taking the proceeds to a more beneficial venture that will still allow them to enjoy the benefits of long-term savings.

They include buying land, Treasury bills and bonds and investing in money market funds.

Another way of saving for retirement is to contribute to an individual pension plan (IPP).

Most IPPs are run by insurance companies and private pension administration firms registered by the Retirement Benefits Authority (RBA).

They allow members to contribute voluntarily towards retirement.

Individual pension plans are especially useful for persons who have no formal pension savings plan or are unemployed.

They invest the money and give good rates of return on investment. They are also flexible enough to allow members to contribute whatever little they have.

Some retirement saving options introduced by the pensions regulator allow members to contribute as little as Sh20.

Although the amount may seem small at first, it earns interest and, subsequently, the interest also earns interest and soon one owns a tidy sum.


Unlike other savings plans, the retirement ones in Kenya offer various tax incentives where savers get tax reduction on their savings.

In some instances, the benefits are enjoyed tax-free.

The earlier one starts saving, the better. It would be pointless to work most of one’s active life and not have money to sustain one in retirement.

Many retirees can attest to the fact that, although what they get per month is little compared to what they used to earn, they are still grateful they have an income.

The rule is to start small, start early and watch your savings grow.

Ms Ogada is the pensions manager, Maseno University Retirement Benefits Scheme. [email protected]