A pension annuity is one of the retirement income products. The alternative of Annuity is Income Drawdown Fund. An annuity is a financial contract you execute with a registered life insurance company where you as a retiree pays a lump sum in exchange for guaranteed, periodic income payments for life or a specified period.
The main purpose of annuity is to eliminate longevity risk. The longevity risk here is financial risk of a retiree outliving their accumulated retirement savings due to rising living expenses, investment risks, and extended life expectancy.
Annuities in Kenya act as a safe-haven asset protecting Kenyan retirees against stock market volatility, real estate liquidity challenges, and dividend cuts.
Why life insurance companies? Because it works like a life insurance policy in reverse, whereby the insurer pays you a guaranteed, regular income for life or a period of time when you give them your retirement benefits or savings.
Annuity Calculator For Kenya
Kenyan Annuity Income Calculator
Calculate your guaranteed retirement payout based on fund value, options, and Kenyan tax rules.
RBA Regulations and Minimum Age to Buy an Annuity in Kenya
Annuity Regulation In Kenya
In Kenya, the Retirement Benefits Authority (RBA) governs the retirement schemes where your funds accumulate.
Retirement schemes in Kenya include occupational, umbrella, or individual pension plans.
On the other hand, the Insurance Regulatory Authority (IRA) regulates the life insurance companies that sell and issue annuity contracts to retirees.
Eligibility Age To Buy Annuity In Kenya
Under statutory RBA rules, the minimum entry age to purchase a retirement annuity is 50 years. Under special circumstances, the minimum entry age can be earlier.
Age 5O years is the early retirement age threshold in Kenya.
The standard official retirement age in Kenya is 60 years for public servants and most formal corporate schemes.
The Statutory 1/3 vs. 2/3 Pension Rule
If you are in a pension scheme, upon reaching the retirement age, you are entitled to withdraw up to ⅓ of your accumulated pension fund as a lump sum. You have the freedom to use this lump sum in ways that fits your financial goals.
The remaining ⅔ of your pension fund, you must (mandatory) purchase a retirement income product. Either an annuity or income drawdown fund.
Provident Fund Rule
If your retirement savings are in a provident fund, upon reaching retirement age, you can access all the accumulated retirement benefits as a single lump sum.
You can use this lump sum as you please or use it to buy an annuity or income drawdown fund.
Some of the documents you need to purchase an annuity include National Identity Card/Passport, KRA PIN Certificate, certified bank account details, proof of age (birth certificate), and beneficiary nomination forms.
You can buy an annuity from three main sources of funds
Sources of Fund To Buy An Annuity
Pension Fund
You can buy an annuity from your retirement savings coming from your employer's pension scheme or an individual pension plan.
If in a pension scheme, you are required to use (mandatory) ⅔ of your accumulated pension fund to buy a retirement income product, in this case, an annuity.
Provident Fund
If your retirement savings are in a provident fund, you can access them as a single lump sum upon reaching retirement age, where you can use all or part of it to purchase an annuity.
Personal Savings
You can buy an annuity from your personal savings, out-pocket lump sum.
One of the best ways to accumulate a fund to buy an annuity or income drawdown fund is to save using an endowment policy with profits such as Britam Akiba Savings Plan.
An annuity has several important features and these features define annuity options in Kenya
Annuity Options in Kenya For Retirees (Features of Annuity)
Guarantee Period Options
When purchasing an annuity, you can choose the period in years during which annuity payments are guaranteed to the annuitant and/or to their beneficiary, whether the annuitant is alive or not.
The guaranteed period is meant to mitigate against the loss of invested funds in case of the early death of the annuitant. If the annuitant survives the guaranteed period, the payments continue until death, regardless of how long they live.
The guaranteed period ranges from 0-20 years in Kenya.
Single vs Joint Life Annuity
A retiree can purchase an annuity on their life alone or jointly with their spouse.
In the event of a joint life, annuity payments are attached to the life of both the annuitant and the spouse, such that payment continues to the surviving spouse even if death occurs to the annuitant.
Annuity payments are paid at a rate of 50% or 100% until the death of the surviving spouse. This rate is chosen by the annuitant.
Escalating Annuity vs Flat-Rate Annuity/Non-escalating Annuity in Kenya
To cushion against inflation or other reasons best known to the annuitant, one can choose to purchase an annuity that increases by a particular percentage (usually 3%, 5%, 7%, or 10% per annum selected at inception) on the anniversary of the policy.
The initial payment for an escalating annuity policy will be significantly lower compared to a non-escalating policy.
The main advantage of escalating annuities is that they maintain real purchasing power against Kenya’s inflation and fuel/food price increases.
For non-escalating annuities (flat-rate annuities with 0% escalating rate), the amount payable does not change during the entire period of the policy.
Flat-rate annuity advantage is that it yields the highest initial monthly income at retirement.
However, non-escalating annuities are highly vulnerable to inflation over a 15 to 20 year retirement span.
KRA Tax Rules: How Are Annuities Taxed in Kenya?
Annuity payments in excess of KES 25,000 per month are taxed. Any payment amount above KES 25,000 is subject to the usual PAYE rates if the retiree is below 65 years.
No tax is applied to annuity payments if the retiree is above 65 years. Retirees aged 65 years and above enjoy a 100% complete tax exemption on all pension and annuity income in Kenya.
Beneficiaries inheriting annuity payouts during guaranteed periods also enjoy tax-free exemptions on inherited pension funds.
Annuity in Arrears
Most annuity payments are made in arrears. That means, if a retiree purchases an annuity at the beginning of the month, usually before the 15th of that month, they will receive the regular payment at the end of the month. If they purchase after the 15th, they will receive the payment in the following month, together with the second payment. In purchasing an annuity, here are important things to know:
- A retiring employee does not have to take an annuity with the company they built up their retirement savings with. They are free to shop around for life insurance companies and get the best deal. I highly recommend this.
- Once you purchase an annuity policy and it commences, you cannot cancel, change or transfer it to another provider. You stick with the company you choose to the end; therefore, choose wisely.
- Once the annuity policy commences, the annuitant is paid on a regular basis depending on their choice of frequency (monthly, quarterly, semi-annually, or annually).
- Annuity rates at the time of purchase depend on: (Prevailing interest rates, the higher, the higher the annuity income, Age, where by the older the annuitant, the higher the income they get, sex whereby if you are a woman, you get lower rates since they have higher life expectancy than men on average, Joint life which attracts lower income since there are two lives in consideration the insurer is likely to pay income for a longer time, guarantee period where the shorter the guarantee period the higher the payout and vice versa, escalation where the higher the escalation rate the lower the initial payouts
- If you are looking for a quote for an annuity policy, the following information is usually required. Name of client, age of annuitant, age of spouse (if joint life), gender of the annuitant, purchase price or the lump sum funds, guarantee period option preferred, escalation rate if required, minimum age (50 years being the early retirement age prescribed by the government or on special circumstances), maximum age (75 years), and minimum amount: Kshs. 600,000
To sign up for an annuity policy, you will be required to submit just a few docs.
- National Identity Card/Passport
- KRA PIN Certificate
- Certified bank account details
- Beneficiary nomination forms
That's all for today. For any questions, post them in the comments section or call/chat with me on WhatsApp.
Frequently Asked Questions On Annuities In Kenya
- Can I withdraw money or cancel an annuity in Kenya?
No. An annuity contract is irrevocable. Once the cooling-off period expires and payments begin, capital cannot be lump-sum withdrawn, cancelled, or transferred.
- Who are the best annuity providers in Kenya?
The best annuities are offered by IRA-licensed life insurance companies, including Britam, ICEA LION, Jubilee Insurance, CIC Group, Old Mutual, and Liberty Kenya.
- What happens if the life insurance company goes under in Kenya?
Policyholders are protected in Kenya by the Policyholders Compensation Fund (PCF) under the Insurance Act, alongside strict IRA capital adequacy ratios that mandate life insurers to hold dedicated backing reserves.
- How do insurers verify I am still alive before making payouts?
Annuity policyholders (annuitants) are required to complete and submit a signed Life Certificate (Certificate of Existence) annually or semi-annually in Kenya.
