Investment Options for Your Pension Upon Retirement

By Cytonn Investments Team

To guarantee income upon retirement, it is important to join a Retirement Benefits Scheme while still in your working years and start your contribution.

On retirement, one should aim to have a monthly income equal to 75% of your last monthly salary.

There are 2 ways to achieve this income: through an Income Drawdown Fund or through purchasing an Annuity.

An income drawdown is an option that allows members of Retirement Benefits Schemes to access their accumulated retirement benefits (the value of your pension at retirement) as a regular income, through reinvesting their benefits in an Income Drawdown Fund registered by the Retirement Benefits Authority (RBA), from which periodic payments are made towards their monthly upkeep and any unforeseen expenses.

An annuity is a contract between an insurance company and an individual where in return for a lump sum of money, in this case, the value of your pension at retirement, the insurance company or approved issuer will give you a periodic income with the choice of monthly, quarterly, half-yearly or yearly payments.

At retirement, a member chooses an insurance provider to purchase an annuity. Annuities are strictly provided by insurance companies.

Options available include but are not limited to;

1. Single Life Annuity – This choice allows you to receive payments your entire life and is limited to your lifetime with no survivor benefit. This means that you die soon after taking the annuity, your beneficiaries do not get anything from the insurance company,
2. Life Annuity with a Guaranteed Period – These are similar to single life annuities described above, but with a minimum period that the annuity will last, say 10- years,
3. Joint and Survivor Annuity – A joint and survivor annuity guarantees payments will last the lives of both yourself and another person, typically a spouse,
4. Systematic Annuity Withdrawal – In this method, you choose the amount of the payments and how many payments you want to receive.

The amount of income payment you will receive will depend on several factors including: (i) the amount paid to purchase the annuity, (ii) age at the time of purchase, and (iii) the benefits options chosen.

For annuities, the more conditions you have, such as including a guaranteed period, adding a spouse to the annuity, etc. the lower the monthly payments that you will receive.

Income Drawdown Funds are widely considered more flexible than Annuities. With an Income Drawdown Fund, you choose how much you want to withdraw from your fund and the frequency.

You can also change the amount of drawdown at a frequency that will be agreed on with your provider.

An annuity provides certainty in retirement but lacks the flexibility that income drawdown provides.

Some factors that you can consider when making the decision between an income drawdown fund and an annuity include:

1. Dependents – As seen when comparing income drawdown and annuities, income drawdown is more suitable for members who have dependents as it allows for inheritance. In case of death, a member may leave their funds to their beneficiaries. On the other hand, the type of annuity that you choose determines whether the payment is only to the annuitant or the spouse in case of death;
2. Size of the Retirement Pot – We would recommend income drawdown for members with a large fund at retirement. RBA had initially set this at a minimum of Kshs 5.0 mn but this has since been removed from the guidelines;
3. Health Status – The status of your health will most likely determine how long you will live post-retirement; good health will mean that you are likely to live long after retirement. You do not want a scenario where you outlive your retirement savings;
4. Other Income Sources – Retirees with other income sources, such as property and investments are able to take up more risks and therefore the income drawdown may be the better option;
5. Risk Appetite – Retirees have the varying risk appetite. With the normal retirement age in Kenya being between 50-years and 75-years, people who retire at 50 are able to take up more risk and should join an Income Drawdown Fund, while those who retire later than 70-years are not able to take up much risk.

You have worked hard to get to retirement and can finally enjoy your golden years! The critical decision you have to make is how to invest your accumulated retirement benefits to ensure that they provide an income that will afford you a comfortable retirement.

So what options do you have at retirement to invest your benefits?