The National Treasury is working on a proposal that could allow Kenyans aged 50 and above to access their pension funds without paying income tax, offering significant relief to retirees.

The proposal, now being revisited after the defeat of the Finance Bill 2024, could offer long-awaited financial relief to thousands of retirees who have been taxed heavily on their hard-earned savings.

Currently, those aged between 50 and 65 are subject to substantial tax deductions on their pension benefits.

The first Sh600,000 withdrawn is tax-free, but the next Sh1.6 million attracts taxes ranging from 10 to 25 per cent, with any amount beyond that facing a hefty 30 per cent tax.

Only those over 65 can currently access their full pension without deductions.

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However, a fresh proposal from the Treasury seeks to lower this age threshold, allowing individuals over 50 to unlock their retirement savings without the tax burden.

Treasury Cabinet Secretary John Mbadi highlighted the issue during a recent briefing.

“Currently, you must wait until you are 65. Some people retire at 60 and do not want to pick up their pension benefits and have to wait until they are 65. Some people may die before the five years are over,” Mbadi said pointing out the unfairness many retirees face under the present system.

The proposal echoes measures found in the now-rejected Finance Bill 2024, which had sought to exempt retirees from taxes on pension benefits across various savings plans.

These included retired pension funds, registered provident funds, individual retirement funds, and the National Social Security Fund (NSSF).

The exemption would not only cover standard retirees but also extend to those who exit the workforce early due to ill health, as well as individuals who withdraw their savings after at least 20 years of membership in a retirement fund.

Experts have long advocated for this change, seeing it as a necessary protection for vulnerable retirees. 

Analysts highlighted the potential benefits of the proposed tax exemption, stating that it would enable individuals to access their retirement funds earlier without facing tax deductions.

“The proposed provision will allow individuals to access their retirement money earlier without incurring taxes. The proposal will also be a reprieve for retirees who would only enjoy the exemption after attaining 65 years," an analyst stated.

"Further, the exemption for individuals who retire early due to ill health may cushion such persons from their sudden and unplanned loss of income.”

If implemented, the policy would represent a dramatic shift in how pensions are handled in the country.

Many see the current system as outdated, particularly as more individuals are retiring earlier due to various factors such as health or redundancy.

The proposed exemption would bring much-needed flexibility to pension access, allowing individuals greater control over their financial future as they enter retirement.

This tax-free pension proposal is part of a broader set of amendments to tax laws that the Treasury is expected to table in the coming months, following the withdrawal of the Finance Bill 2024 and the reshuffling of leadership within the Ministry.

Should it come to pass, thousands of retirees could soon breathe a sigh of relief, no longer watching their pensions dwindle under the weight of heavy taxation.