Taxation plays a significant role in shaping the net returns earned by members of retirement benefits schemes in Kenya. While pension schemes enjoy important income tax exemptions, the operational services they consume attract indirect taxes that ultimately affect member outcomes. Understanding how Value Added Tax (VAT) and Excise Duty apply to scheme management, administration and audit expenses is therefore critical for trustees and contributors alike.
In Kenya, VAT at the standard rate of 16.0% applies to most management, administration and audit services provided to pension schemes. These services are classified as taxable professional services rather than exempt financial services. Consequently, fees charged by fund managers, administrators and custodians attract VAT at 16%. In addition, excise duty at 15.0% is generally applicable to fees charged by financial institutions, including fund managers and custodians. Audit services, while not subject to excise duty, are subject to 16.0% VAT. Although a registered pension scheme’s investment income is exempt from income tax, the services consumed to generate and safeguard that income are not VAT-exempt.
Chronologically, the tax framework has long provided incentives to encourage retirement savings. Investment income earned by registered schemes is exempt from income tax, allowing compounding to occur more efficiently. Member contributions of up to KES 30,000.0 per month, or KES 360,000.0 per year, are tax-deductible, promoting disciplined long-term saving. In addition, monthly contributions to post-retirement of up to KES 15,000.0 medical funds are tax exempt. These incentives are designed to enhance retirement adequacy. However, the imposition of VAT and excise duty on scheme expenses partially offsets these gains.
The impact is direct and measurable. Management, administration and audit fees are paid out of scheme assets. When these fees are increased by 16.0% VAT and, in some cases, 15.0% excise duty, the total expense ratio of the scheme rises. Over a working lifetime of 30 to 40 years, even a small annual reduction in net returns due to taxes on expenses can significantly erode the final retirement benefit. Lower net investment returns translate into smaller accumulated balances and reduced pension income for members.
Recognizing this concern, the Retirement Benefits Authority has proposed, in its legislative policy proposals for the 2026 financial year, that retirement scheme management and related services be zero-rated for VAT purposes and exempted from excise duty. If implemented, this reform would lower operational costs, improve net returns and strengthen retirement adequacy. For members, this means more of their contributions would remain invested and compounding for their benefit. For schemes, it would enhance efficiency and align tax policy more closely with the broader objective of promoting long-term savings and financial security in retirement.
