Income drawdown is one of the two retirement income products in Kenya. The other one is an annuity. Income drawdown is an alternative to the traditional annuity. It is a variable annuity that allows a retiree to receive an income regularly from their retirement savings, while keeping the balance invested in a guaranteed fund.
This retirement income product is designed to meet the needs of individuals who would like to control their retirement savings through investment and flexibility in how they receive regular income. These individuals are not afraid of investment and longevity risk.
In this plan, the retirement savings lump sum is used to purchase interest-earning assets from which the member will draw the income regularly.
An income drawdown fund must run for at least 10 years. That is the regulation by the Retirement Benefits Authority (RBA). That means you will draw income in a way that the fund won’t run out in a period of not less than 10 years. To ensure this, one of the regulations is that you cannot withdraw more than 15% of the outstanding balance of the fund at the beginning of the year.
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To understand income drawdown, here are its key features.
Pension Income Drawdown Key Features
- 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 You can also choose to buy an annuity with the withdrawn amount.
I believe you are now very well equipped with the necessary information on your pension options at retirement. In brief, you have 3 pension options at retirement, depending on the retirement planning product you have. You can get a single lump sum if your 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.
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