Pensions – The Investment You Can Bring Home to Meet Your Parents

We are living in the age of technology. Pretty much everything we need to do is virtual and online and this has only gotten worse since the words “social distancing” have entered our vocabularies. Our shopping, our schools, our relationships, our hobbies and most definitely, our money – everything is online. Cryptocurrencies and NFTs are replacing gold and Pokemon cards (although if you follow Gary Vee, I’m sure he’s got something to say about rookie sports cards). We are bombarded by choices in all areas of our lives and our attention is being perpetually traded. There’s too much for us to think about what we need to filter out and what we should internalize.

I write about money, so it’s easy to see how I think with so many choices, it can be terrifying to think about what to do with your money. Whether it’s real estate, stock trading, collectible investments, or trading in actual physical items like gold and silver, these can all be done online. The internet has democratized information. In the past for example, in order to invest in real estate, you’d probably need to have a high net worth, good connections at the bank, and or look for properties (if you didn’t hire a real estate agent to help you find it). A fairly lengthy process but one that many real estate investors were used to. Today, however, anyone with a little spare cash can invest in Real Estate Investments Trusts (REITs), real estate cloud funding platforms, and Airbnb among many others. There are a lot of possibilities, and this is just in real estate.

Breakdown of what the real-estate investments are…

  • REITs – Are like buying shares in a real estate management company, whose core business is renting out and selling real estate. They (have to) give back a large percentage of their profits back to their investors in the form of a dividend.
  • Real estate cloud funding platforms like Real Crowd, Groundfloor, and Fundrise. In this arrangement, you act like a creditor and the funds pooled together by your fellow investors give the selected individual or company the funds it needs to kickstart their real estate project. You have the choice of where you want to put your money and the platform may act like a risk assessor and set the terms for both parties. You are then returned your principal plus a tidy sum as interest.
  • Airbnb – You may have used this platform on a recent travel (or at least before the pandemic stopped all non-essential travel. Put simply though, you can sublet apartments for rent and earn a sizeable commission by flipping houses for rent & you don’t even need to own the place.

There are a lot of options and newer and innovative options pop up every single day. Each option though has an opportunity cost tied to it. With every choice you make, you close the door on other options. This is happens if you diversify your investments and instead of going big on buying a home, you split your investment activities in stocks, foreign exchange, real estate, and whatever else choice you make. For each choice there is an element of risk and reward, the less you know about a choice the more likely you are to overestimate its rewards and underestimate the risks.

With so many choices, it’s hard for anyone to think which route to take with investments. Your risk profile and age will greatly help push you towards certain types of investments. You can calculate your risk profile here if you are curious. The general rule is, the younger you are, the more you can take on a risk because you have time to make up for any losses. When you are younger, “YOLO” isn’t the worst way to think about investing on certain areas. But just remember I said YOLO and not YOLOBDBD (You Only Live Once But Don’t Be Dumb).

Our choices are often dictated by where we are and we hope to go which is why we humans have a hard time thinking far off in the future. Our brains, no matter how developed are more concerned with day to day, especially if we are still scrapping in trying to improve our base quality of life. You can’t tell someone worried about rent to think about investing in REITs. But one area that many of us do need to consider, irrespective of how old you are is the thought of retirement. Whether that is retiring sipping cocktails on the beach or living on your little farm where you can pick your lunch and dinner off the land. If you’re curious, the second version is my ideal retirement scenario.

We are now living much longer than previous generations expected us to. This means that when we retire around the age of 60-70, we can expect to live at least another 30-40 more years. We need to make sure that during our working lives we save enough to retire comfortably in and at least without having to depend on anyone, be it the government or our own children. The Gig economy and the economic hardships make it tougher for many people’s vision of retirement to come into existence but we have to prepare for it.

See retiring or some form of it is a fact of life. There will come a point where we can’t work as much, or for as long as we’d like to. It’s totally natural. Phrases like a “job for life” and “you take care of the company, and they take care of you” are saying of a bygone era. In the past, you may have had a job for life at a company if you didn’t much around too much while at work. Your employer and you would contribute an amount (above your pay) until the day you could no longer work for them. You would then leave with your head held with knowledge of your devoted service and a nice little sum of money to ride of in the sunset (of your life) with. Brilliant idea! I know in Kenya it’s still the case for some individuals who work for such companies like NGOs and the larger companies. Some even have the ability to take their pensions with them should they change companies.

Nowadays, it’s more likely that you’re employed by a company on a contractual basis for a certain number of years. This works in the company’s favour in that if they want to make a change they have the ability to without going through tedious processes of explaining why you’re being let go and any extra payments to the employee that go along with it.

Setting up a Personal Pension Plan (PPP)

So how do pensions help in all of this talk about retiring. It’s quite simple, well at least in Kenya, it should be fairly simple. If you don’t have a company sponsored pension, you can sign up for one from any of the registered pension providers. Usually insurance providers will also provide these plans and you can check them out. You can and should shop around to look at things that matter like:

  • Historical interest rates of the fund
  • Options for paying out and the fees and penalties associated with withdrawing early
  • Any additional benefits i.e. may be they have free term-life insurance (I haven’t seen in my experience looking around but this would be a great add-on – anyone reading this in the pension and insurance industry, may be something for you to consider)
  • Ease of making payments and the ability to check your contributions
  • How accessible customer service is to answer your questions

If you have a company sponsored pension plan you should definitely look at what happens if you move companies. Ideally, you’d want to be in total control of your money if you can and not be at the mercy of any one entity.

Convincing you – WHY Pensions

A pension plan basically works like a savings account specifically for the purpose of retiring. This means that you shouldn’t access your savings before the age of retirement (or early retirement) otherwise you will be liable to pay certain penalties. Now that the big sticking point is out, I can share why you need to overlook that and still get a PPP.

It’s fairly easy to sign up for and usually on par in terms of interest rates with what’s offered by other “safer investment” choices like a fixed deposit account or savings account in a bank.

Another reason is that it’s not easy to get your money out – which means you are almost forced into saving for retirement and punished for withdrawing from it. Younger people don’t think about retirement so being forced to save can be a good thing even if you don’t contribute much to it. This means that your money will be growing much faster as you won’t be taking any money out till its time to retire. You could decide to withdraw money from your pension plan but you’ll be penalized and taxed highly.

Speaking of taxes, did you know that pension contributions are tax free? I hope you liked that segue and it didn’t feel too forced. Say for example, you earn Ksh. 100,000 as a gross amount. You know you have to pay about 30% income tax (in Kenya). Ksh. 30,000 goes to the well-run government of Kenya as your tax contribution. This is fine, it’s great to pay your taxes and build the revenues of your country‘s politicians. Too real? It is what it is. But if you are contributing to your pension fund up to a maximum tax-free amount of Ksh 20,000 then you’ll be paying be less tax legally. Yes, please read that again, paying less taxes LEGALLY.

If you don’t get what this means, let me put it simply. You get free money that would have otherwise gone into the coffer’s of the government‘s pilferers. But wait?! You might be thinking, it’s not free money because I gave up 20,000 that I could have used on something else. Well, you didn’t give it up because you are still keeping that money aside for your future but I understand your point. And you can contribute less if you’d like and you’ll still receive some of that free money in other ways.

The other option is if your employer won’t deposit it directly, then you can contribute with your after tax salary and you are in line to receive a tax refund from you the Revenue Authority for a large percentage of the funds you deposited into your pension plan.

(Not so) Humble Brag Alert! Yes, it is possible to get a tax refund from Kenya Revenue Authority. I know because I got one for 2019 and let me tell you I got more joy from that then the day I graduated because I had a lot of people laugh when I said I’ll do it and I did. But enough of me bragging about how I got one of the most notorious government bodies in East Africa to give me money.

Recently, laws have passed in Kenya that allow individuals to use their part of their pension savings as a security to fund the purchase of their first home. This move received a lot of backlash because it meant that more people would be have the flexibility of using that option and it would directly cause people to retire with less. But it meant that people have another choice with what they can do with their own money. For the most part I think choices are good, too many choices are not but this choice to help fund a home is definitely a positive one.

Pensions are definitely not as “sexy” and cool sounding as becoming an overnight bitcoin millionaire but it’s a realistic plan for anyone who wants to start putting down a plan for retiring.

My Journey so Far with Pensions

Personally, I looked at a couple of options before starting my second real life job for starting a pension plan. I decided to go with Jubilee Insurance because their representative took a lot of time to answer my questions (I spent an hour asking all the questions in his office), their contribution process was fairly simple and I could deposit my contributions via mobile money, and I could check on my fund with a few clicks on my computer.

I am making a concerted effort to increase my monthly contributions and get closer to maxing out my contributions. But like I said earlier, with youth comes the ability to take on risk so I also use it as a way to balance my investments in riskier investment. I think someone said “don’t put all your eggs in one basket” a really long time ago. Good advice.

I hope I’ve made a decent case on why you should think of adding a pension plan as one of your investment baskets. If you need any help or have some questions that I could answer on pensions please feel free to reach out. Thanks for reading and I wish you all the success in the world.

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