Wednesday, April 17, 2024

Should I take lump sum payout rather than monthly payment?


Securing your future through retirement planning requires discipline, foresight and commitment to taking action. PHOTO | SHUTTERSTOCK

What are simple rules and basic advice for pensioners when they receive their lump sum payout rather than a monthly payment? Should I take my company pension as a monthly annuity or a lump sum payout?

There are many options for retirees in Kenya. Which option one goes for depends on many variables, one of them being the type of pension fund or scheme.

There are three kinds of pension funds or schemes in Kenya; Pension funds, Provident funds and Individual Pension funds or IPP’s.These work in pretty much the same way in that, they exist to ensure that every member of the fund has a financial corpus at retirement.

How they do this is subject to mainly the set of rules that govern the fund, called the trust deed and rules document and as well as their investment policy statements which outline investment strategy.

Going back to the types of funds and options on retirement; Pension funds demand that each member of the fund on retirement, have access to a ceiling of a third of their corpus with the rest of the amount going into a post-retirement product or solution.

It is important to note that this rule does not say that one must access the one-third, but merely gives a ceiling of access.

Provident funds on the other hand allow the members of the fund to have full access to their funds after deduction of relevant tax.

The options available at retirement for individual funds depend on how the fund was set up, and the origin of the funds, voluntary contributions in these funds cases can be fully accessed even before retirement.

What is the right decision to make for a retiree?

Well, this depends on the individual, very much like any other financial decision that one makes in their lifetime.

There are a number of factors to consider, and I shall proceed to highlight some of the key considerations one needs to make.

The first one is to assess to which extent will your income from retirement be your only source of income at retirement.

The more sources of income you have away from your retirement pot the more options you can exercise at the time you decide to retire.

Please note that your options at retirement are very much dependent on the decisions you make during your lifetime in a pension fund or scheme, and very little to nothing at all can be done to change this at the point of retirement.

Should the retirement pot you have amassed be your only source of income, or should it be the most significant part of your income, it would then be prudent to deploy most if not all of your retirement corpus in a post-retirement product or solution.

In this territory, you have two options, and these are either an annuity or a pension as most of us call it, or an Income Drawdown or IDD as it is most referred to.

The choice between the two is based on other factors such as amount or corpus, risk appetite, other income away from the retirement funds ambit, and the preference of receiving retirement income.

IDD arrangements are known to be more flexible for retirees and provide a chance for the retiree to share in the profits that the funds make; while annuities are typically more rigid but offer a variety of options to the retiree such as having a joint annuity with one’s spouse.

The second factor to look at is to envision how a typical day in retirement will look like, at this point, it is important to seek the counsel of those that have been through this journey before you.

Here you will learn of the good and bad of decisions made, some of them I must say are horror stories that will do you a lot of good in avoiding.

Your retirement consultant, either from your occupational scheme or even your independent financial consultant, should have the ability to guide you based on your personal situation.

Your pension administrator should have a few of these individuals to guide you.

What is important as you envision the typical day in retirement is to ensure that you have enough in the way to an assured income to meet your needs and wants.

It is imperative, for example, to ensure that you can have decent meals, can move around and can take care of your family’s activities without much trouble.

Again, should you not have significant income away from the retirement funds, please place more of the retirement corpus in a post-retirement solution.

The third factor to look at is, to what extent can some of your obligations be cleared up in one fell swoop. For example, do you have a pending house loan?

Pending lien from various undertakings? Do you need to make a final payment on your mortgage to be free of it?

As you will no longer be in employment, can you purchase a group life cover that only requires you to make one initial payment, and have it cover you for the rest of your life?

Do you have enough to build that retirement home you have always dreamed of?

Do you have enough to go for that initial retirement holiday you had planned or is it now a pipe dream?

If the answer is yes to any of the important ones and should you have enough to cover them and still replace a substantial part of your income, then by all means, arrange to receive some of your funds as a lump sum.

The intention here being that you will be easing your financial burdens and not adding to them by making rash spending decisions.

It is imperative to know that for most retirees, health is an issue that cannot be taken lightly, hence a good health plan such as health insurance, post-retirement medical arrangements or even ensuring one has enough constant liquidity to take care of the exclusions of these plans is key.

Seeing as so far, there might not be a medical plan where one can pay a lump sum and have themselves covered for the rest of their natural life, it may be prudent then for retirees who are wholly or largely dependent on retirement income to channel most if not all of their retirement funds to post-retirement solutions.

The benefits here are twofold; the first is that the retiree would have enough income to each year renew their medical insurance, and the second being that innovative plans have within them medical plans where one can automatically have deductions made to take care of these renewals as and when they fall due.

So, is it prudent to take a lump sum or spread it as income over one’s retirement? The choice is yours, and hopefully, after careful consideration of your financial health, you can make the right decision, this writer however, recommends that in your decision, always set aside a portion of your retirement corpus and place it in a plan that gives you monthly or periodic income.

Whether this is an annuity or an income drawdown is up to you depending on the amount, risk appetite and considerations of other income away from the retirement ambit.

Otenyo is a senior consultant on retirement solutions. Email: [email protected]

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