OPINION: What a gratuity tax break means for your retirement

Retirement should mark the beginning of a well-earned rest, but for too many Kenyans, it has become a time of financial anxiety. The numbers tell a sobering story. According to the latest RBA Pensioners Survey, a staggering 84% of retirees exhaust their lump-sum gratuity faster than they anticipated.

Picture this: after decades of service, you finally receive your hard-earned 6-million-shilling retirement payout, only to watch Ksh.1.8 million disappear in taxes before you can even plan how to use it. This was the harsh reality for countless retirees until now. The Finance Bill amendment to exempt retirement gratuity from taxation changes this fundamentally. Your entire payout now remains yours to use as you see fit.

This policy shift couldn't come at a more critical time. Retirement lump sums aren't abstract figures on a bank statement - they represent real financial security for Kenya's ageing workforce.

The same RBA survey reveals that 62% of retirees depend on these funds for essential healthcare needs. Consider Mzee Kamau, a retired teacher from Nakuru, who has to choose between paying for his chronic illness and repairing his roof after taxes claimed nearly a third of his gratuity.

Stories like his explain why this tax exemption matters so profoundly. For others, this money represents their only opportunity to start a small business, invest in farmland or help put grandchildren through school.

The practical impact of this change is immediately apparent. That same 6-million-shilling gratuity can now purchase a decent residential plot outright in many areas, or cover several years of living expenses for the average retiree household.

For those entering retirement with existing debts, it means being able to clear loans in full rather than making partial payments. The difference between receiving Ksh.4.2 million and Ksh.6 million can determine whether a retiree spends their golden years in relative comfort or constant financial worry.

But no single policy can address all retirement challenges. Payment delays, reported by 78% of pensioners in the RBA survey, still disrupt financial planning and inflation continues to erode purchasing power year after year. A lumpsum that seems substantial today may lose significant value over a retirement that could last some decades.

So, the exemption gives retirees greater control over their initial lump sum, but doesn't automatically solve the challenge of making that money last. This is where personal financial planning becomes crucial. The policy creates opportunities, but individuals must make wise choices to maximize its benefits.

Have you considered how to allocate your gratuity most effectively? Would investing in rental property provide steady income? Might setting aside a portion in fixed-income instruments help preserve capital? These are the questions retirees should be asking now.

For those still years away from retirement, this policy change serves as a reminder to understand your employer's retirement benefits structure. Not all retirement packages are created equal, and the difference between a well-structured plan and a basic one could determine your quality of life in later years. It's worth asking your employer how this change affects your specific retirement package and whether additional voluntary contributions could further enhance your payout.

By allowing workers to keep their full gratuities, the policy acknowledges the fundamental truth that these funds represent deferred compensation for a lifetime of work, not windfall gains that should be heavily taxed. It aligns Kenya's treatment of retirement benefits more closely with international best practices, where such lump sums often receive favorable tax treatment.

Yet the work doesn't stop here. Pension system reforms should continue to focus on making retirement savings more accessible to workers in the informal sector, who currently lack such protection. Easing the cost of living could ensure that every shilling is stretched. These could be natural next steps in creating a more comprehensive retirement security framework.

For now, the policy provides the tools for a more secure retirement, but individuals must know that retirement security depends on both sound policy and personal responsibility working in tandem.

Mr. Wafubwa is the CEO, Enwealth Financial Services