We are going to evaluate the following modern and some popular traditional savings vehicles against considerations – taxes, charges, fees and penalties – when choosing an appropriate savings vehicle.

• Mobile & Web Application driven saving vehicles and aggregators
• Savings Bank accounts
• Merry Go round Chamas
• SACCOs
• Bank deposits (Fixed & Call deposits)
• Treasury Bills (TBills)
• Money Market Funds

Taxes

In Kenya, interest income earned from bank deposits, treasury bills, money market funds, Mobile & Web Application driven saving vehicles and aggregators and interest paying SACCOs  is taxable. The withholding tax rate applicable is 15%.   For Saccos that pay dividends, the withholding tax rate applicable for dividends is 5% for Kenyan residents.  Withholding tax is the tax that is withheld at source. The amount is deducted from your gross interest earnings on the savings and paid to KRA by the bank, fund manager or Sacco.

It is important to note that withholding tax is not a final tax. Kenyan income tax Act requires that we pay a tax of 30% of all our earnings.  So the rest of the amount (30-15 =15%) is still payable to KRA and is accounted for as an individual does their tax annual return.

As an individual does their personal financial plan, it is important to consider minimization of taxes as one of the main objectives. One, however, has to also take into consideration the cost-benefit analysis of investing in each of the vehicles. While in the Merry-Go-Round Chama, one may not pay any taxes, the earnings (from the chama) mostly, are significantly lower or nil compared to the earnings of the other tax-withholding-saving vehicles.  In addition, the merry-Go-Round Chamas have higher risks.

Charges and Fees

Charges and fees include any amounts charged by the savings vehicle for offering the saving facility or for movement of cash e.g management fees charged by the fund managers and transaction charges.

Charges and fees in a savings vehicle should be minimal. The higher the fees and charges, the lower a vehicle should rank unless the net earnings on the vehicle exceed those of other vehicles.

Most of the Money Market Fund managers in Kenya charge between 2% to 2.5% of the Assets Under Management (AUM) as management fee. This management fee, however, is usually already factored in the yield rate for the fund. Such that if a fund’s shows that the yield rate is 9%, the 9% is net of the management fee. There are no management fees or charges in Mobile & Web Application driven saving vehicles and aggregators, bank deposits or savings accounts. However, some Saccos charge, a standing annual fee.

Transaction fees is the amount charged for moving money from one account to another. Moving money from one financial institution to another or one account to another in the same institution or platform usually attracts a fee.  So any savings vehicle that requires a saver to move cash from one account to another will have this this cost.

Penalties

A penalty is a charge that is imposed for non-compliance of certain rules or at exit. The Money market funds, treasury bills do not charge any penalties.  Some saving bank accounts and Mobile & Web Application driven saving vehicles and aggregators may put a limit on the number of times a saver is allowed to withdraw cash. Non-compliance may lead to penalties.

Bank Term Deposits do not penalize savers unless the saver wishes to withdraw the amount in the fixed deposit before the pre-determined period of time has elapsed. The penalties differ from one institution to the next.

Some Saccos even though they may have a different name for this, usually retain a pre-determined amount at the exit point. That amount maybe seen as a penalty for exit. Some Merry-Go-Round Chamas sometimes penalize members for varying reasons depending on the rules of the chama.

Though most individuals tend to ignore the impact of taxes, transaction fees, management fees and penalties on their savings, the impact can be significant over a long period of time. A saver should ensure that the saving vehicle of choice has as minimum leakage as possible.

Article done by Peninah Kimani

CEO Givva Wealthtech