Government Cuts Pension Tax Burden to Boost Retirement Savings

NAIROBI, Kenya – The government has increased the deductible pension contributions, easing the tax burden on Kenyans planning for early retirement and those looking to boost their pension savings.

Effective December 27, the Tax Laws Amendments Act, 2024, raises the monthly deductible pension contributions from Sh20,000 to Sh30,000.

The Retirement Benefits Authority (RBA) highlighted that these changes align tax legislation with current economic conditions, promoting increased retirement savings.

“These reforms align tax legislation with the current economic realities, addressing long-standing challenges to promote retirement savings, ease healthcare burdens, and empower retirees,’’ said RBA CEO, Charles Machira.

The revised law also raises the annual deductible contributions from Sh240,000 to Sh360,000, providing significant benefits to both employees and employers.

The RBA anticipates this will incentivize more workers to enhance their pension contributions, reaping the dual benefits of higher savings and substantial tax advantages.

One of the key changes in the legislation is the lowered age threshold for tax-free pension withdrawals.

Individuals aged 38 and above, who have been members of a pension scheme for at least 20 years, can now access their funds without tax penalties.

Previously, this benefit was reserved for those aged 65 and older.

Moreover, the reforms extend tax exemptions to early withdrawals due to health reasons, ensuring that retirees facing medical challenges can access their funds without financial strain.

“The exemption from tax also applies to withdrawals from the funds before attaining retirement age due to ill health or after attaining 20 years from the date of registration as a member of the fund,” the RBA noted.

Prior to these changes, lump-sum pension payouts for retirees under 65 were taxed progressively, with rates reaching up to 25% on amounts exceeding Sh1.2 million.

This often resulted in significant tax deductions from retirees’ savings.

Addressing the critical need for healthcare in retirement, the new regulations introduce a tax-deductible limit of up to Sh15,000 per month for post-retirement medical funds, easing the healthcare cost burden for retirees.