Kenya Treasury Proposes Sweeping Changes to Pension Tax Laws for Early Access

Kenya Treasury Proposes Sweeping Changes to Pension Tax Laws for Early Access

Kenya Treasury’s medium-term revenue strategy has proposed a significant shift in the pension laws.

The proposed changes would create an exempt-exempt-exempt structure, meaning that pension contributions, investment income generated from pension contributions, and withdrawals would all be tax-free. This is a departure from the current system where only contributions and investment income are tax-free, while withdrawals are taxed depending on the age of the contributor.

The Reasoning Behind the Proposed Changes

The Treasury believes the current system is discriminatory, as it forces people to wait until they are 65 to avoid tax on early withdrawals. This proposed change is expected to benefit those considering early retirement. However, it has elicited mixed reactions from industry experts, with some expressing concern about potential abuse and implications for pension schemes’ cash management.

Limitations and Further Speculations

The Treasury has stated that exempt contributions to the pension scheme will be limited to a certain threshold to prevent tax planning, but has not provided further details. There is speculation that the government may lower or maintain the current Sh20,000 exempt threshold to minimise losses. Currently, the Kenya Revenue Authority allows a monthly tax relief of up to Sh20,000 for contributions to a registered pension scheme. Pension and lump-sum payments made after the age of 65 are tax-free.

Implications of Full Tax Exemption

The proposed full tax exemption would ensure that amounts above Sh20,000 are not subject to tax upon withdrawal. However, some industry experts warn that allowing early access while maintaining or reducing the tax exemption amount could discourage pension savings and prompt individuals to seek alternative investment options. This could potentially lead to a decrease in the number of people investing in pension schemes, thereby affecting the economy’s overall pension fund.