Treasury plans to scrap tax on early pension withdrawals

The Kenyan Treasury has announced its intention to remove taxation on pension withdrawals made by individuals below the age of 65, providing relief for those considering early retirement. However, this proposal poses challenges for pension administrators.

1. As part of its medium-term revenue strategy, the Treasury plans to revamp existing pension regulations, which currently impose significant costs on workers seeking to access their pension funds before reaching the age of 65. These changes could be implemented as early as July of next year.
2. The proposed overhaul would shift the pension tax structure from exempt-exempt-tax to exempt-exempt-exempt, ensuring that withdrawals are exempt from taxation regardless of the taxpayer’s age.
3. At present, only retirees aged 65 and above can access their pensions tax-free. Individuals between the ages of 50 and 65 are allowed a tax-free withdrawal of up to Ksh 600,000, with the remaining amount subject to taxes ranging from 10% to 30%. Those under 50 face similar tax rates but with a lower tax-free threshold.
4. The new exempt-exempt-exempt structure would exempt pension contributions, investment income generated from pension contributions, and withdrawals from taxation. This change aims to address the current discriminatory nature of the system, where withdrawals made after the age of 65 are tax-exempt, while those made before that age are taxable.
5. The Treasury acknowledges that the current system encourages individuals to delay accessing their pensions until they turn 65 in order to avoid taxes on early withdrawals. The proposed revisions would provide significant tax savings for those seeking early access to their pensions.
6. Industry experts have expressed mixed opinions on the proposed changes. While some believe it will offer tax relief to those opting for early retirement, concerns have been raised about potential abuses of the system. It is anticipated that the Treasury may introduce age thresholds to prevent such abuses and safeguard the cash management of pension schemes.