The world is evolving swiftly and surely. Imposing yesterday’s
normalcy on a changed today will definitely lead to missed opportunities
birthed by modern innovative investment solutions.
One
such solution for retirees today is the option of drawing their monthly
pension from an Income Drawdown Fund as opposed to traditional
annuities offered by insurance companies.
Even with
limited information given to retirees about Income drawdown funds, the
solution is quickly becoming popular for the retiree looking to get the
most value out of his accumulated lump sum.
Enwealth
Financial Services, one of the pioneers offering the solution is today
managing an income drawdown account of more than Sh1.5 billion within a
period of three years since its introduction.
Kenya’s retirement benefits regulations allow for pension scheme
members to access up to a third of their savings as a lump sum at
retirement and the balance used to purchase of a regular pension through
an annuity or an income drawdown fund.
The income
drawdown fund is an investment product that allows a retiree to reinvest
their accumulated retirement savings through a fund registered by
Retirement Benefits Authority (RBA) and set up for the purpose of paying
regular pensions to retirees.
This allows a retiree
to benefit from income arising from investment of the lump sum and
translates to higher regular payouts to the member.
The RBA provides a clear legal framework for all registered income drawdown funds.
This
ensures the rights of the retiree are protected given the long-term
nature of the investment. The maximum payout is 15 per cent of the
purchase price per year whereas the minimum drawdown period is 10 years.
Therefore, if a member has invested a lump sum of Sh5
million they would be able to draw down up to Sh750,000 per annum or
62,500 per month. This payout may be sustained for a period of between
40-50 years assuming the prevailing economic conditions and a stable
interest rate environment is maintained.
The maximum
drawdown limit of 15 per cent is required to ensure the funds are not
exhausted during the lifetime of the member thereby providing some
protection from the risks associated with longevity.
Although
income drawdown funds do not expressly guarantee protection from the
risks of longevity, they are arguably one of the most attractive options
at retirement due to the following advantages:
They
offer stable investment returns since the funds are invested
conservatively with the aim of preserving capital and achieving modest
growth over the long-term. It also effectively meets the cashflow needs
of a retiree.
Income drawdown funds also afford the
member the opportunity to leave an inheritance in the event of demise at
any point in time without any guarantee period restrictions — as long
as there remains a balance in the member’s fund.
The member has the flexibility to review their options after the minimum drawdown period of 10 years.
After
the 10 years, the member will choose whether to access the balance as a
cash lump sum, purchase an annuity or continue participating in the
income drawdown fund.
The legal structure also ensures
the safety of members funds since all monies are managed by separate
and independent service providers for administration, custody and
investment under the oversight of trustees and independent reporting to
the RBA.
There
is transparency in the management of the fund with members having the
opportunity to interrogate the audited financial statements, attend
annual general meetings and receive their individual balance statements
annually. Income drawdown often provides additional benefit enhancements
that vary with each fund.
With so many benefits to be
enjoyed through an income drawdown fund, I may be inclined to say that
it is the best option, however, it would be a fallacy to conclude that
it is automatically suitable for all retirees.
It is
important to get professional advice which takes into account your
income, liabilities and assets in order to formulate a retirement plan
that will enable you to enjoy a sustainable lifestyle in retirement.
Enwealth
offers retirees advisory services and innovative solutions to guide
retirees to achieve their financial goals and ultimately, financial
freedom.
Evelyne Ngalaka is advocate and consultant at Enwealth Financial Services Ltd.
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