A pension is a retirement plan that provides regular income to individuals upon retirement. Contributions in pensions are made by both employer and employee in umbrella or occupational schemes or by individuals in personal schemes. Gratuity on the other hand is a lumpsum payment, paid by the employer to an employee as a token of appreciation for the years of service. In gratuity, the employer makes the contributions and is paid either at the end of service or after a specified period, as determined by the employer.
Regarding tax treatment, pension funds enjoy tax benefits from contributions and savings. Pension funds enjoy tax relief on contributions of up to KES 30,000.0 per month. Additionally, pension funds provide tax exemption on savings for those who have retired from a registered scheme after a minimum of 20 years or have retired early due to ill health. Similarly, contributions to gratuity enjoy the same tax advantages as pensions. However, payment of gratuity is exempted from tax only if made under a public pension scheme.
Pensions savings can be withdrawn upon reaching the retirement age as per the scheme’s policy. Members who make additional voluntary contributions (AVCs) are also allowed to access those funds before the age of 50. In addition, members with critical illnesses and those who permanently relocate from the country are permitted to access their retirement savings before their retirement age. However, for gratuity one can only access their savings upon retirement, resignation or termination. Notably, you can transfer your gratuity benefits to a pension scheme.
Pensions schemes in Kenya are regulated by the Retirement Benefits Authority (RBA), whereby the fund manager invests scheme assets, the trustee oversees the fund’s governance and compliance, the administrator manages member records and benefits, and the custodian securely holds the fund’s assets. This structure ensures transparency, accountability, and segregation of duties, safeguarding members’ benefits and promoting efficient and compliant management of pension funds, while maintaining independence from the employer’s influence. The RBA Act allows members to change retirement schemes without losing their savings or incurring tax. The regulation nature of pension funds also makes employer contribution mandatory unlike gratuity, where it is only mandatory if stated in contract or via Collective Bargaining Agreement. For gratuity, the employer has full control of the funds. An employee might not be entitled to their gratuity if their employment contract has conditions such as minimum service length or age. Additionally, if one is terminated due to gross misconduct or summary dismissal, they might lose their gratuity.
For individuals who want to enjoy a lifetime income with tax benefits and high returns, choosing a registered pension scheme is the best option.
