Introduction to Pension

A pension is basically money you save while working so that you have income when you retire and stop earning from your job. Think of it as planting a tree: the money you put in now grows over time so you can enjoy the shade (income) later. 🌳💰

How a Pension Works

1. You contribute: Every month (or year), a part of your salary goes into a pension account.
2. Employer contribution: Often, your employer also adds money to your pension.
3. Investment growth: The money isn’t just sitting in a box—it’s invested in safe options like government bonds, stocks, or money market funds.
4. Retirement payout: When you reach retirement age (usually 55–60), you start withdrawing money regularly.

Example:

You contribute KES 5,000 per month.

Employer adds KES 5,000.

Total monthly contribution = KES 10,000.

After 20 years, thanks to growth from investments, your savings may have grown to KES 5 million.

Who Can Join a Pension and How

• Employed people: Most companies automatically enroll employees in a workplace pension plan.
• Self-employed: You can join a private or individual retirement plan.
• How to join:
  1. Open a pension account with a licensed pension fund administrator (PFA).
  2. Fill in your details and choose a plan.
  3. Start contributing regularly.

Analogy: Think of it like joining a “community savings club” where everyone deposits money, it grows, and then members benefit later.

How Compounding Works (Money Growing on Money)

Compounding is when your savings earn interest, and then that interest also earns interest. Over time, this can make your money grow much faster.

Analogy: Imagine rolling a snowball down a hill: the bigger it gets, the faster it grows.

Simple Example:

You save KES 10,000 today.

Each year it grows 10% (interest).

Year 1: KES 10,000 × 10% = KES 1,000 → Total = KES 11,000

Year 2: KES 11,000 × 10% = KES 1,100 → Total = KES 12,100

Year 3: KES 12,100 × 10% = KES 1,210 → Total = KES 13,310

Protection of Savings

• Pension funds are regulated by law to protect your money.
• Funds are invested in safe assets like government bonds, blue-chip shares, and cash instruments.
• You can’t just lose it easily—even if the company you work for goes bankrupt, your pension is protected by law.

Analogy: Think of your pension like a savings box with a lock that only you (or the law) can open when the time comes.

Recap with a Simple Analogy

Concept	Analogy
Pension	Planting a tree today to enjoy shade later
Contributions	Watering and fertilizing your tree regularly
Employer contribution	Neighbor helping water your tree
Compounding	Tree growing bigger every year, even faster as it matures
Protection	Strong fence around your tree so no one can steal it