At retirement, what are your pension options? This is a question you should ask yourself early enough before your retirement date. There are 3 ways to go about it, depending on the retirement planning product you have, either a pension or a provident fund, and you need to understand each well, since they determine how you will access your retirement savings. The retirement benefit options are regulated by the Retirement Benefits Authority (RBA).
The retirement planning product you have will determine your take-home retirement package. There are two retirement planning products in Kenya: the pension and the provident fund.
Let us briefly focus on retirement planning products, what they are and how they determine your final payment after retirement.
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Retirement Planning Products
Pension
A pension scheme is one of the retirement planning products. If you get employed and you are pensionable, you automatically get into your employer’s pension scheme. If the employer has no such kind of scheme, you are at liberty to look for an Individual Pension scheme, where you contribute a certain amount for retirement. It is also considerable to mention that even if you are not in formal employment and you have an income, you can contribute to an individual pension scheme. That money you contribute accumulates and grows over time until retirement.
According to the regulation in Kenya, when you retire, you are supposed to take ⅓ of your pension as a lump sum, and the remaining ⅔, you must purchase retirement income products. These retirement income products are your pension options at retirement.
Provident Fund
A provident fund enables you to save for retirement with the possibility of accessing all the retirement savings as a lump sum.
You save money for retirement in a provident fund as an individual or a joint contribution between you and your employer.
Your money in a provident fund accumulates and grows as you continue saving up to retirement.
Now that you understand what retirement planning products are and the options that will be available at retirement to access your money, let’s now focus on retirement income products that you can buy at retirement.
Retirement Income Products
There are two (2) popular retirement income products at retirement in Kenya when you reach the retirement age of 60 years or early retirement at 50 years. These retirement income products are your pension options at retirement, and are Annuities and Income DrawDown (IDD). Let’s explain both and see how they will shape your future after retirement.
Annuities/Life Annuities
You purchase an annuity with at least ⅔ of your pension lump sum. If you have a provident fund, you can allocate all or a portion of your lump sum payment to buy annuities. However, as we have discussed earlier, in provident funds, you can receive the whole lump sum payout and walk away without buying retirement income products.
In the life annuity retirement income option, you get a guaranteed income for the rest of your life as a retiree.
For instance, if your pension or at least ⅔ of your pension is KES 1,000,000 and you buy an annuity, you will receive, as a rough estimate,
KES 1,000,000 (0.01) = 10,000 per month.
We assume you shall get 1% of your pension fund used to buy an annuity.
In annuities, you can decide to receive a fixed monthly income or add some options or benefits to the payments.
There are three (3) major options available in annuities. You can choose to bring about the guarantee period or the income escalation element. The third option is to receive a fixed income, as calculated above.
The guarantee period option allows you, as a retiree, to add the number of years the regular income should flow to you and/or beneficiaries. The Income is guaranteed for a specific period of time, for example, 10 or 15 years. If the retiree dies within the guaranteed period, payments continue to the beneficiaries. If the guaranteed period ends and the retiree is still alive, the insurer continues to pay the income to the retiree until they pass away.
Another option in annuities is the element of escalation rate. The retiree chooses if they want the income they receive to increase by a certain percentage as time goes by. This means the income they receive increases with each payment.
Why do many retirees choose this option? They choose annuities because of the promise of guaranteed income for life. Again, annuities have no investment risk. The insurer absorbs all the risk.
However, some retirees refuse to go down this road. Why? Because income is usually fixed, the plan allows no flexibility in how you make your withdrawals. Again, since all the risk is with the insurer, the retiree cannot access the original capital. Once you buy an annuity from the insurer, you completely waive the right to touch your pension fund again.
Income Drawdown (IDD)
As a retiree, you can also decide to opt in for Income Drawdown, where your pension funds are invested, and you withdraw income periodically, an amount you choose yourself.
Your pension will remain invested in a pension fund, and you will receive regular payments monthly, quarterly, or annually. This payment continues until the funds are exhausted.
Since your pension funds are invested, the returns can increase or decrease, and the income levels you receive can be adjusted accordingly. It is important to note that there is a minimum drawdown period, usually 10 years. Again, the withdrawal you make in a single year cannot exceed 15% of your pension funds. This is to prevent the funds from depleting fast and early.
The main benefits that make retirees adopt this option are the potential higher returns, flexible withdrawals, and the remaining funds can be inherited.
However, this retirement income option has high investment risk that will definitely affect income, and funds can run out quickly if heavily withdrawn, leaving you financially exposed.
Frequently Asked Questions About Retirement Pension Options in Kenya
FAQs About Retirement Planning Products
- What are retirement planning products?
Retirement Planning Products are financial vehicles that help individuals save and grow their money during their working years to provide income after retirement. They include Pension Schemes, Individual Pension Plans, and Provident Fund. They are regulated by the Retirement Benefits Authority (RBA).
- What is the difference between a Pension Scheme and a Provident Fund
A pension scheme just allows members to access just ⅓ of their pension savings and invest the remaining ⅔ of their pension in retirement income products. On the other hand, the Provident Fund grants the retiree access to their retirement savings in a lump sum.
- Can I have more than one pension plan in Kenya?
Yes, you can contribute to multiple retirement schemes, depending on your financial goals.
- Are contributions to pension plans tax-deductible in Kenya?
Yes, they are. Contributions to registered pension plans qualify for tax relief up to specified limits. Tax relief makes them a tax-efficient way to save for retirement.
- Can the self-employed save for retirement?
Yes, self-employed individuals can contribute to Individual Pension Plans or personal retirement schemes designed for people in informal employment.
- When can I access my retirement savings?
The normal retirement age is 60 years. Early retirement is 50-55
years. You can access your retirement savings at normal or early retirement.
- What happens if I change jobs?
If you change your job, you have the option to transfer your pension to your current employer’s scheme (not recommended), let it stay in the existing scheme, or transfer it to an individual pension plan (highly recommended). Talk to me so that I can guide you on how to do it and where to get the best growth rate.
- Are pension funds safe in Kenya?
Yes, they are very safe. Pension schemes are regulated and supervised by the Retirement Benefits Authority (RBA), ensuring proper management and protection of members’ funds.
- How much should I save for retirement?
You should save around 10-15% of your income. However, the amount you should save should be informed by your financial goals and lifestyle expectations.
- What happens to my pension if I die before retirement?
The accumulated savings go to your nominated beneficiaries or dependants.
FAQs on Retirement Income Products
- What are Retirement Income Products?
Retirement Income Products are financial solutions meant to help retirees convert their savings into regular income after retirement.
- What options are available for pension income in Kenya?
There are three retirement income products available in Kenya, determined by the retirement planning product you choose. They include annuities, income drawdown, and lump-sum withdrawal.
- Which is better: income drawdown or annuity?
This purely depends on your needs, but I would go for an annuity. Even though income drawdown gives flexibility and potential growth, annuities guarantee a stable income.
- Can I switch income drawdown to an annuity?
Yes, you can with the remaining funds. It is very possible.
Thank you so much, my dear reader, for being here. Allow me to leave it at that. If you have any questions concerning pension matters, leave a comment or call/chat with me directly.
About Me
Hello there! I am David Ndiritu. I am a financial advisor at Britam. My role is to advise you on investments, savings, pensions, protection, medical insurance, education policies, and general insurance, including motor insurance. I am passionate about what I do, and I derive great satisfaction when we find a solution together to your financial goals. If you are looking for a financial solution related to insurance, investment, or pension, chat with me or give me a call. You can also ask for a QUOTE FREE OF CHARGE. Thank you, and I am happy you are here, my dear reader.
