Personal Finance

Drawdown funds key to old age financial freedom

Invest retirement savings wisely to avoid stress. file photo | nmg
Invest retirement savings wisely to avoid stress. file photo | nmg 

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.