Effect of Tax incentives on retirement saving among employees in Audit firms in Nairobi County, Kenya

Abstract

Most governments across the world have put in place laws and policies to ensure that their citizens actively partake retirement saving. Neo-liberal deregulatory policies have been directed towards an “entrepreneurship of the self” where provisions for pension are to be made by individuals rather than by the state. To boost retirement saving, many governments have tax benefits for private retirement plans. The Kenyan government provides substantial tax incentives for retirement saving. These incentives include tax exemption on contributions to retirement savings accounts by taxpayers, tax exemption on investment income accrued within retirement accounts, and tax exemption on withdrawals from retirement schemes. These tax incentives for retirement saving in Kenya have been in place for quite a while. However, a significant percentage of the working population, 80%, are not covered in any retirement pension scheme. Additionally, only 15% out of the 20% covered are confident they have savings to keep them through retirement life. The question of whether these tax incentives are effective in boosting retirement saving remains unanswered. This paper explores the implication of these tax incentives on retirement saving. The aim of the study was to determine the effect of tax incentives on retirement saving. The literature review conducted for this study indicated that all the relevant existing research is of international nature while this study was conducted from a Kenyan perspective and focused on the effect of the tax incentives on retirement saving in Kenya. The theories and concepts guiding this study included the incentive theory of motivation, lifecycle theory, liquidity preference theory of interest, and prospect theory. The study adopted explanatory research design. The target population included employees working in 705 audit firms in Nairobi County with the sample size being employees working in 256 audit firms. Simple random sampling technique was used to select the sample from the population. Primary data was gathered using a simple structured questionnaire and the data collected was analyzed quantitatively to explain the characteristics of the study variables. Descriptive and inferential statistics were employed in data analysis. Descriptive statistics included percentages, means, and standard deviations. Further, inferential statistics such as Pearson correlation and regression analyses were used to test the relationship between the study variables. A multiple regression model was estimated. The study’s findings revealed that tax exemption on retirement contributions, tax exemption on investment income accrued within retirement accounts, and tax exemption on withdrawals from retirement schemes had a positive and significant effect on retirement saving. The findings indicated that tax exemption on retirement contributions had a positive and significant effect on retirement saving (β = 0.261, P = .000<.05). The findings also showed that tax exemption on investment income accrued within retirement accounts had a positive and significant effect on retirement saving (β = 0.240, P = .002<.05). Further, the findings indicated that tax exemption on withdrawals from retirement schemes had a positive and significant effect on retirement saving (β = 0.254, P = .002<.05). The study concluded that tax incentives contribute positively to retirement saving. The government through the Retirement Benefits Authority should review policies relating to tax exemption on retirement contributions, investment income accrued within retirement accounts, and withdrawals from retirement schemes. Furthermore, the government should create awareness to the public on tax exemptions available on retirement contributions, investment income accrued within retirement accounts, and withdrawals from retirement schemes.