Almost everyone knows that a retirement scheme’s main purpose is to help the pension holder live off the rest of their years free of financial worry. Few people ever note that the money can actually be withdrawn long before the date of retirement.
There are several kinds of pension plans, each with their own structure and work book. They include the Public Pension Fund, the Individual Pension Plan, the Occupational Pension Scheme, the Defined Contribution Plan, the Defined Benefits Plan and Group Pension Plans.
The benefits of any of these schemes kick in within the first 60 days after retirement.
With Group Pension Plans, early withdrawal is almost impossible. Due to the fact that many people are part of one pool, early withdrawal causes the collective interest of an investment to decline. However, the Retirement Benefits Authority (RBA) reports that Personal Pension Plans are a little bit more flexible. With at least 23 registered schemes to choose from, almost anyone can make an early withdrawal.
Even then, the Income Tax Act and RBA Regulations do not allow policy holders to do it while they are still under their current employer. However, exceptions can be made if the situation meets a certain set of standards.
So when and how, exactly, can a pension holder withdraw their cash?
For public pension funds, withdrawing money before the stipulated time is only done in case of emergencies. In this particular case, the National Social Security Fund (NSSF) policy can only be withdrawn if the holder is forced into retirement by permanent disability or is otherwise unable to work based on other extreme factors.
Aside from the initial plan of waiting for retirement, policy holders may be forced to deal with pressing and immediate financial concerns. It may be an unpaid mortgage, a sick child or some other form of debt. Whatever the case, pulling out something from a retirement plan is usually a last resort.
Some Plans are more lenient and allow the pension holder to withdraw their money before retirement. Nevertheless, this kind of pull out is safeguarded by guidelines set place by the service provider.
Penalties for Early Withdrawal
Penalties for early withdrawal vary depending on the service provider. Kenyan Alliance Insurance, for instance, only allows tax-free withdrawal from after 15 years or in cases of a medical emergency.
Some plans, like ICEA’s Umbrella Personal Retirement Scheme and CfC Life’s Group Pension Scheme, do not allow policy holders to withdraw their money when they are still employed. However, exceptions are made for people emigrating from the country, those who are unable to carry on with their employment and those who are permanently and totally disabled.
On the other hand, the Alexander Forbes Vuna Plan has no penalties for early withdrawal while the Amana Capital My Pension Policy allows subscribers to use about half their funds to pay off a mortgage (Read this for Pesatalk’s piece on Pensions and Mortgages).
Jubilee Insurance’s Personal Pension Plan allows early withdrawal but legislative taxes still apply. According to a tax report by Deloitte and the Kenya Revenue Authority, all early withdrawals are subject to normal Pay as You Earn (PAYE) rates as shown below:
| Amount | Taxable Percentage |
| First KES 121,968 | 10% |
| Next KES 114,912 | 15% |
| Next KES 114,912 | 20% |
| Next KES 114,912 | 25% |
| Above KES 466,704 | 30% |
Taxes aside, early withdrawal of a pension plan can cause the policy holder to miss out on accumulative interest. If a person uses part of their pension for medical treatment, whatever remains will obviously be less than what they initially anticipated.
The same thing applies to other emergency expenses. Whatever money a person withdraws reduces the amount of interest they were supposed to get had the cash remained intact. Lucky for them that service providers like Britam have tax-free early withdrawals up to the applicable limits set by the KRA.