RBA plans to block pension withdrawals for savers under 50 years

The Retirement Benefits Authority (RBA) has proposed new pension regulations aimed at preventing workers below the age of 50 from accessing their pension savings early.

According to Business Daily, RBA's move is intended to strengthen retirement security, as many retirees in Kenya struggle financially after exhausting their pension savings too soon.

Under existing laws, Kenyan employees are allowed to withdraw up to 50 per cent of their pension savings when they change jobs.

While this provision was initially designed to ease job transitions, it has inadvertently led to reduced long-term savings.

Studies indicate that many retirees find themselves without sufficient funds to sustain their needs in old age, with over 80 per cent of elderly citizens still working to survive.

The proposed reforms are meant to curb the financial struggles retirees face due to early pension withdrawals.

According to the RBA, they are suggesting that the National Treasury restricts access to pension funds before the age of 50 will ensure that workers have enough savings upon retirement.

"We have seen a worrying trend where Kenyans deplete their retirement savings long before they actually retire, leaving them vulnerable in old age. These changes are aimed at reversing that trend and securing a better financial future for retirees," an RBA official said.

What are the proposed changes?

The proposed amendments to the pension laws include:

1. No early pension access for those under 50

Workers below 50 years will no longer be allowed to withdraw pension savings when switching jobs. This ensures retirement savings remain untouched until a later age.

2. Exceptions for additional voluntary contributions (AVC’s)

Workers who make additional voluntary contributions (AVCs) separate from mandatory pension deductions will still be allowed to access those funds before turning 50.

3. Special considerations for health and migration

Employees facing severe health challenges or permanently leaving the country will be permitted to withdraw their pension savings early.

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The proposed restrictions will have several implications for both employers and employees.

Workers will need to find alternative ways to save for emergencies since pension funds will be locked until the age of 50 this will make financial planning more critical.

As for employers, companies may introduce financial literacy programs or flexible savings plans to help employees manage their finances better.

With workers unable to access pension funds when switching jobs, some employees may opt to stay in their current positions longer, potentially reducing job market flexibility.

How will this compare to other countries?

The proposed regulations align Kenya’s pension rules with global trends.

• United States: Withdrawals before age 59.5 attract penalties unless due to specific hardships.

• United Kingdom: Pension withdrawals are permitted from age 55, with 25 per cent being tax-free. Early access is illegal unless the pensioner is ill.

• Australia: Pension access begins at 55-60, depending on birth year, with early withdrawals allowed only for extreme financial hardship.

The proposed pension restrictions by the Retirement Benefits Authority (RBA) come with both benefits and challenges.

Advocates of the policy argue that it will improve retirement security by ensuring that pension savings remain intact until retirement, providing financial stability for retirees.

Additionally, the move is expected to reduce old-age poverty, as more retirees will have adequate funds to sustain themselves without becoming financially dependent.

By restricting early withdrawals, the policy also aims to instil a stronger culture of long-term savings among Kenyan workers.

However, concerns have been raised over the potential hardships the restrictions may cause.

Critics warn that workers facing financial emergencies may struggle without access to their pension funds.

Employee frustration is also expected, with many feeling restricted by the new regulations. Additionally, implementing and enforcing the changes could pose significant challenges for both employers and regulatory bodies, requiring strict compliance measures to ensure the policy's effectiveness.

While the RBA believes these changes are necessary for long-term financial security, the proposal is likely to spark debate among workers, employers, and policymakers. The government is expected to engage stakeholders before finalizing the pension reforms.