Personal Finance

How to live comfortably in retirement through income drawdowns


Kenya's retirement environment has slowly improved over the years. Research, however, suggests that a pension crisis could be looming. This situation is exacerbated by two hurdles.

First, only around a quarter of working Kenyans save for retirement, with approximately 12 million having no savings plan to fall back on when they retire from working.

Secondly, those with retirement plans are likely to earn income that is far less during retirement compared to their pre-retirement salary.

The first hurdle is due to systemic issues that will take time to correct – and this involves concerted efforts by the government, regulators, insurance companies, individuals, and households to encourage saving for retirement.

The fundamental questions

How then do we make retirement benefits available to everyone, regardless of who they are, where they work, or how much they earn? What is the solution to increasing retirement pension uptake in Kenya? Should the government step in and make pension contributions mandatory?

Is it possible for the industry to receive higher tax breaks so that Kenyans can benefit from tax-advantaged savings in order to invest and grow their money? These are the fundamental questions of our time.

The second barrier is at the root of retirees' concerns. They are concerned about whether their retirement savings can translate into stable income growth in the face of volatile economies and market returns, and whether they will have enough money to carry them through the rest of their golden years.

With this knowledge, the insurance industry must design innovative retirement solutions and maximise investment returns on assets, so that retirees can attain decent retirement with their hard-earned money saved during working years.

To help individuals make investment decisions that increase long-term returns to cover their specific retirement situation, an innovative approach is required, which includes not only rethinking the traditional one-size-fits-all solutions to retirement investments but also taking risk profiles of different individuals into account.

Why income Drawdown?

To meet customer demand of increasing long-term returns, regulators around the world have come up with regulations that allow retirees to use their retirement savings to purchase a pension income through a guaranteed annuity or an Income Drawdown fund.

Income drawdowns allow clients the flexibility to decide the amount of income they need each year, from their accumulated retirement savings. This sum withdrawn yearly is then subtracted from one’s retirement savings account, while the balance continues earning investment income.

The key benefit of this solution is that one benefits from investment growth depending on the market’s performance. If the fund is properly managed (with regular advice from financial advisors), one can live on investment income before consuming the capital invested (accumulated retirement fund), for several years.

For instance, Liberty Life has an income drawdown called (Boresha Ustaafu) which provides clients (50 years and above) and differs from a regular annuity as it permits the retirees' fund to earn investment income while at the same time providing income (to be drawn for a minimum period of 10 years).

The balance can either be accessed by the client as a cash lump sum or may continue being drawn down as pension income.

In the evolving economies, retirees need sound advice on drawdown strategies in order to get the best out of the solution and enjoy a sustainable lifestyle in retirement.

At the end of the day, a retiree's decision is based on the vision for their pension: is it to provide them with income in retirement, to leave a financial legacy for their family, or a combination of the two? That decision is fully dependent on their own unique circumstances and tastes, but there are now additional options to ensure comfortable retirement thanks to an enabling environment.