The world is evolving swiftly. 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. It is quickly becoming a popular option for the retiree looking to get the most value out of their accumulated lump sum.
The income drawdown fund is an investment product that allows a retiree to reinvest their accumulated retirement savings through a fund registered by the 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 their lump sum and translates to higher regular payouts to the member.
Kenya’s retirement benefits regulations allow for pension scheme members to access up to one-third of their accumulated savings as a lump sum at retirement. The balance is used to purchase a regular pension through an annuity or an income drawdown fund. The Retirement Benefits Authority provides a clear legal framework for all registered income drawdown funds. This is important to ensure that the rights of the retiree are protected given the long-term nature of the investment. The maximum payout is 15% of the purchase price per year whereas the minimum drawdown period is ten years.
Therefore, if a member has invested a lump sum of KShs. 5,000,000 they would be able to draw down up to KShs. 750,000 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 is maintained. The maximum drawdown limit of 15% 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
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