A Guide to Pension Schemes in Kenya


People prepare for their old age and retirement in different ways. Some invest in their children as a means of survival when they grow old while others invest in pensions. Pensions are useful, especially to the retiring employees when they reach the retirement age. Preparing for your old age is essential when you have the energy to work by saving for your family. Pensions attract interest over time, and by the time you are retiring, you will have accumulated enough money to keep you moving.
taxation of pension benefits in kenya

Kenya’s Pension System

The National Social Security Fund provides financial security benefits to Kenyans when they retire. The system works from the contributions made by the members and it mainly covers the formal employment sector.

The new NSSF Act states that 12 percent of the pensionable wage shall be submitted to the NSSF as contribution. The 12 percent contribution is divided into two; 6 percent from the employee and 6 percent from the employer. However, this Act has not yet come into effect due to many legal actions. The old NSSF Act is still in effect where every employee is entitled to contribute Ksh 200 (about 2 USD) with a similar amount coming from the employer. It is important to note that pensions are not mandatory for employers since they are free to establish employment schemes.

Salaries, Pension and Labor Laws in Kenya

The Pensions Act in Cap 189 provides for proper regulation of pensions, gratuities and allowances for all public service officers in Kenya working under the Government of Kenya. People working in the private sector can also make their contributions. The Retirement Benefits Authority (RBA) was established to regulate, supervise and promote the retirement benefits schemes that are primarily occupied by employees in the formal employment sector.

The Employment Act 2007 in the 9th and 10th Section states that every employee shall be employed under a contract. The contract shall include pensions and pension schemes. This implies that employees should be involved in pension schemes.

Benefits of Pensions

Pensions have several benefits to an individual and his family either when he or she dies or upon retirement. The dependants of the employee enjoy certain benefits. We will highlight the benefits of pensions to the employee upon the death of the employee and benefits he accrues.

Pension schemes support one's family upon retirement or death.
Pension schemes support one’s family upon retirement or death.

Benefits of Pensions to the Family upon the Death of the Employee

The 17th Section of the Pensions Act provides that the dependants of the employee should receive benefits after this death. It can also be after retirement of the employee if he has worked for ten or more years. One can receive pension benefits in a lump sum or the form of pensions. If the deceased has not named a beneficiary or a dependant, then the trustees are at free will to exercise their discretion to distribute the benefits to the dependants.

Pensions Benefits to an Employee upon Termination of Employment

Unfortunately, in Kenya, there are no unemployment benefits. However, there are instances when one can receive pension benefits in case of termination of employment. Section 6 of the Pensions Act provides for payment of pension, gratuity and allowances in case of termination of one’s job.

An employee is entitled to severance pay, which should not be less than 15 days pay for every full year he works with the same employer. However, if the termination of the employment contract of the employee is due to misconduct, he is not entitled to severance pay. The Employment Act also provides that an employee should get remuneration for work done before termination, annual leave pay and certificate of service.

Calculation of Pensions

The Old NSSF Act requires 10 percent of the employees’ income as contribution. However, there is a monetary ceiling of Ksh 400 contribution combined. However, the new NSSF Act requires 12 percent contribution; 6 percent from the employee and the other 6 percent from the employer. The new NSSF has two tier contributions. The first tier contribution is based on the pensionable earnings that are below the minimum wage set. The second tier is based on the pensionable gains that exceed the minimum wage limit. The lower wage limit is set to be increased from Ksh 6,000 the first year and Ksh 7,000 on the second year until the fifth year. The Cabinet Secretary will then settle on the monthly contributions based on the lower limit that will be arrived at.

Taxation of Pension Benefits in Kenya

Pensions attract tax regulated by Section 8 of the Income Tax Act. Benefits accrued from pensions are taxable. However, members can opt for a tax-free lump sum benefit of Ksh 60,000 upon retirement for every year they remain members until they reach a maximum of Ksh 600,000.

The following benefits are taxable, the first Ksh 600,000 lump sum pension benefit, contributions less than Ksh 20,000monthly or 30 percent less the pensionable salary and income earned from investments.


Pensions are essential to dependants and the employee in case of his death or upon his retirement. It is therefore necessary to become a member of a pension scheme in Kenya.

Vincent is a writer and researcher with an interest in finance, banking, startups, and remittance. He holds a Bachelors degree in Applied Statistics with computing. He founded Nexin Startups, an online platform offering startup advice to investors and entrepreneurs. Read more about us and our authors.