Don’t rush to remove money from pension; you might lose!

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

01 February 2026

Ben Mwangi says that he has recently discovered that the earnings report by his pension scheme appear to be too low when compared to what he earns from savings invested in a money market fund: “Last year the pensions earned 8 per cent while my savings were averaging above 12 per cent. Should I withdraw from the pension and put the money in the markets?”

Not so fast, Ben! One of the greatest benefits of a pension is that in comes with generous tax exemptions. Contributions below Sh20,000 per month are fully deductible from tax calculations. This means that, the pension amount is deducted from your income before tax calculation.

For example, if you earn Sh50,000 per month and you contribute, say, 5 per cent (or Sh2,500) to a registered retirement benefits scheme, then you will automatically save Sh750 from your income tax deductions. This comes about because salaries above Sh32,334 attract 30pc tax and 30pc of Sh2,500 is Sh750.

This is an important point to keep in mind when comparing the returns of a pension scheme to those of a regular money market fund. The money invested in such savings has already been taxed before it gets to you. Thus, saving Sh2,500 is equivalent to putting Sh3,571 in a pension. If Sh3,571 is taxed at 30pc, you will be left with Sh2,500.

Therefore, by similar calculation, we find that a return of 8pc from a pension fund is equivalent to 11.4pc in the money market fund (or any other savings account). The second advantage of pensions is that the earnings exempt from the usual 15pc withholding tax. Thus, this 11.4pc is tax-free. A money market fund would have to earn about 13.4pc for the net return to match the 11.4pc of the pension scheme.

But there is a catch. If you withdraw funds from a pension scheme before retirement or before reaching the age of 65 or before the end of 20 years from the date you opened the account, then the amount will be taxed – albeit at lower rates than normal income tax. Making an early withdrawal will significantly reduce the tax benefits hence it may not be a wise move.

All things considered, even though the years earnings of pensions can appear to be low (I have seen some returning 3 per cent in some years), they are comparable to those of regular money market funds because of the tax benefits.