Income drawdown is one of the two retirement income products in Kenya. The alternative is the traditional annuity.
Income Drawdown in Kenya is simply an arrangement where a retiree draws a regular periodic income from a specialized investment fund where their accumulated pension savings are reinvested.
Income Drawdown fund keeps the principal sum invested in market assets such as bonds, equities, and money markets, unlike annuity where capital is permanently exchanged with a guaranteed, regular income.
This retirement income product is designed to satisfy the needs of individuals who would like to control their retirement savings through investment and flexibility on how they receive the regular income. These individuals are not afraid of investment and longevity risk.
In an income drawdown plan, the retirement savings lump sum is simply used to purchase interest-earning assets, mentioned above, from which the member draws the income regularly.
Kenya Income Drawdown Calculator
Kenyan Income Drawdown Calculator
Simulate your post-retirement portfolio performance, annual withdrawals, and KRA tax relief based on RBA guidelines.
RBA Regulations & Income Drawdown Rules in Kenya
Before you opt for income drawdown in Kenya, there are certain regulations that have been put in place by the Retirement Benefits Authority (RBA)
They include:
- Minimum Drawdown Period
An income drawdown fund must run for a minimum of 10 years.
According to RBA, the income drawdown agreement must be structured for a minimum period of 10 years.
This means you will draw income from the specialised investment fund in a way that your invested funds won’t run out in a period of not less than 10 years.
One of the ways to prevent your invested fund from depleting is to limit the amount you can draw from the fund. You cannot draw more than 15% of the outstanding balance of the fund at the beginning of the year.
- Eligible Funding Sources and The 1/3 Rule
At retirement, you can access ⅓ of your accumulated pension scheme balance as lump sum, tax free.
The remaining ⅔ must be transferred directly into an RBA-approved Income Drawdown Fund or purchase an annuity.
For those whose retirement savings are in a provident fund, rather than in a pension scheme, you can access your package in full and use the money as you see fit, which include purchasing an annuity or re-investing in income drawdown fund.
- Minimum Entry Age
Join an income drawdown fund, the minimum entry age is 50 years, aligning with statutory early retirement rules in Kenya.
Withdrawal Limits: How Much Can You Withdraw from Income Drawdown in Kenya?
To protect your retirement savings from depleting very early, there are certain measures that have been put in place by the Retirement Benefits Authority (RBA).
- Withdrawal Caps and Limits
RBA regulation sets maximum annual drawdown limit of up to 15% per annum of the initial or annual residual fund balance to prevent rapid capital depletion.
Most insurers or providers in Kenya allow you to set a fixed monthly, quarterly, semi-annually or annual income payout.
- Capital Preservation Mechanics
Let’s say the Income Drawdown Fund has a net return of 13% p.a.
If you withdraw from the fund and amount that is less than the net return, for example you withdraw 10% of the net return, your invested funds will continue to grow.
If you withdraw more than the net return, you will experience capital erosion leading to the risk of fund depletion.
Tax Regulations: Tax on Income Drawdown in Kenya
Enrolling in an income drawdown fund comes with certain tax benefits.
- Tax-Free Transfer
Rolling your accumulated retirement benefits to into an RBA-registered Income Drawdown Fund is tax-free.
- Monthly Income Tax Exemptions
The first KES 25,000 per month (KES 300,000 per annum) of the income you draw from your invested funds is tax-free.
Payouts above KES 25,000 per month are subject to standard individual PAYE income tax bands on the surplus amount.
- Senior Citizen Exemption (Age 65+)
Senior citizens above the age of 65 years do not pay income tax on all drawdown withdrawals regardless of the amount.
What Happens to an Income Drawdown Fund After Death in Kenya?
When a retiree dies, the amount or balance in an Income Drawdown Fund belongs entirely to their estate or beneficiaries.
This is different from a single-life annuity where payouts stop upon death.
The beneficiary can receive the payout in two ways/options:
- Beneficiaries can receive the remaining capital as a single lump-sum distribution, subject to applicable tax rules if under 65 years of age.
- Or the beneficiary can continue receiving regular drawdown income until the 10-year contract period expires. After the contract expiry after 10 years, the remaining capital is paid out in full.
Annuity vs Income Drawdown in Kenya
The key features that distinguish Income Drawdown Fund for an annuity is market risk, fund longevity, income withdrawal flexibility, and estate inheritance.
As opposed to an annuity, in Income Drawdown, you as a retiree bears market risk and you can adjust payout rates and frequency.
Unlike in annuities where the fund is protected from depleting, income drawdown fund attracts longevity risk where the retiree outlives the fund.
In income drawdown, if the retiree passes away, their balance is passed to the heir, as I have explained above.
We can summarise income drawdown by highlighting some of its key features.
Income Drawdown Key Features/Summary
- Flexibility of drawdowns whereby you, as the policyholder, will have some discretion on the amount and timing of the payment of your regular income benefit. However, the amount is subject to the maximum monthly drawdown amount.
- It also brings some element of tax efficiency, whereby it allows you to defer your withdrawals up to the age of 65. In the current tax regime, if you are 65 years and above, you will receive tax-free income drawdowns.
- Your retirement benefits will be invested in a guaranteed fund with a minimum return of say 5% of fund value per annum, say in the first three (3) years of policy. From here on, the fund will continue earning returns according to the market performance with no guaranteed return rate. However, the undrawn fund is guaranteed against any reduction due to market volatility.
- In the event of the death of the policyholder, the remaining undrawn funds in their investment account will be paid to the nominated beneficiaries in full.
- At the end of the mandatory 10-year lock-in period, the policyholder is free to access/withdraw the full outstanding balance in their investment account or continue with the drawdown arrangement. You can also choose to buy an annuity with the remaining balance.
Top Income Drawdown Providers in Kenya And How to Select One
Some of the major RBA-approved insurers and providers of Income Drawdown Fund include Britam Insurance, ICEA Lion Insurance, Jubilee Insurance, and GenAfrica.
To select the best provider you should check the following before committing:
- Check their Income Drawdown Fund historical returns. Check their track record of net annual yield relative to inflation.
- Find out their management and administration fees charges.
- Find out their payment speed and flexibility. Ask yourself questions like “Do they allow adjusting of drawdown frequencies (monthly, quarterly, semi-annually, annually)?, “Do they offer access to online self service?”. Such enhancements are very important.
I believe you are now well equipped with the necessary information on the Income Drawdown Fund option.
Income Drawdown Fund is one of the pension options at retirement in Kenya.
Simply, you have 3 pension options at retirement in Kenya, depending on the retirement income product you have.
You can get a single lump sum if your accumulated retirement savings are in a provident fund or buy retirement income products (annuity and income drawdown) if your retirement benefits are in a pension scheme or provident fund.
You can read this article I wrote earlier on pension options at retirement in Kenya for a full understanding.
If you have any questions about Income Drawdown or related topics, just call or chat with me through the WhatsApp link provided here or fill the quote form provided above.
Frequently Asked Questions
- Can I switch from an Income Drawdown to an Annuity in Kenya?
Yes. You can convert your remaining income drawdown fund balance into a lifetime annuity at any point during your drawdown period.
However, you cannot convert an annuity back into a drawdown.
- What is the minimum capital required to open an Income Drawdown account in Kenya?
Previously, RBA had recommended a minimum pot of KES 5 million.
The current regulations allow asset managers to set lower operational thresholds, starting as low as from KES 100,000 to KES 1,000,000.
- What happens after the 10-year minimum drawdown period ends?
You can choose to extend the income drawdown contract, cash out the remaining balance, or transfer the residual balance into purchasing life annuity.
