PENSION ANNUITY
A Pension Annuity is a product offered by insurance companies to a retiring member of a Pension scheme. It provides a regular income for life in exchange for a lump sum.
It works like life insurance policies in reverse.
An Annuity is an insurance product designed to provide an income to an employee upon retirement.
You see, while you are in employment, your financial needs are taken care of by your monthly income. What happens, then once you retire? The financial needs do not \”retire\”with you. They indeed increase! It is for this reason that an income replacement arrangement is necessary. Ordinarily, an annuity is purchased with funds from a pension scheme.
Sources of funds:
Pension Funds: A retiring member of a Pension scheme can access as a lump sum a
maximum of 1/3 of their retirement fund at retirement while the remaining 2/3 have to
purchase a pension annuity.
Provident Funds: A Provident Fund pays the accumulated retirement fund as a lump
sum. A retiring member of a Provident Fund can use part or their entire retirement fund
to purchase an annuity.
Main features of an annuity.
Guaranteed period:
This is a period of years during which annuity payments are guaranteed to be paid to the annuitant and/or his beneficiaries whether the annuitant is alive or not. This is meant to mitigate against loss of invested funds in event of an early death. If an
annuitant survives the guaranteed period, the payments continue until death regardless of how long they live.
Single or Joint Life
A retiree has a choice of taking an annuity on his/her life or together with a spouse. In
event of a joint life, the payment of annuity reverts to the surviving spouse and it is
payable at a rate of 50% or 100% until death of the surviving spouse.
Escalating
To mitigate against inflation, a client may choose to purchase an annuity that increases either by 3% or 5% on the anniversary of the policy. The initial amount for this policy will normally be significantly lower compared to non escalating policy.
Non escalating annuities the amount payable does not change during the entire
period of the policy.
Taxation
Annuity payments in excess of Kshs. 25,000 per month are taxed. Any figure above
Kshs. 25,000 is subjected to usual PAYE rates.
No tax is payable from age 65.
Annuity in arrears
Britam’s annuity pays in arrears. This means that once the funds are received the initial payout is made at the end of the month. Funds received before 15th of the month are paid at the end of the same month. Funds received after the said dates are paid in the following month together with the second payout.
Important to note:
1. A retiring employee does not to have to take an annuity with the company they
built up your pension fund with. They are free to shop around from Insurance
Companies and get the best deal.
2. Once the policy commences it cannot be cancelled, changed or transferred to
another provider.
3. Once the policy commences, the annuitant is paid on a regular basis depending
on their choice of frequency i.e. monthly, quarterly, semi annually or annually.
4. Annuity rates at the time of purchase depend on:
a. Interest rates – The higher the prevailing interest rates in the investment
market the higher the income.
b. Age – the older the annuitant when they buy the annuity, the higher the
income they get. This is because the insurer doesn\’t expect to be paying it
for as many years.
c. Your sex – women are offered lower incomes than men for the same lump
sum because they live longer on average.
d. Joint life – This attracts a lower income since there are two lives involved
and the company is likely to pay the annuity for a longer time.
e. Guarantee period – The shorter the guarantee period the higher the
payout.
f. Escalations – Escalating annuities start with a low income which increases
every year by a predetermined rate. The higher the escalation rate the
lower the initial income. We provide 3% and 5% escalation rates.
5. The following information is therefore required to quote:
a. Name of Client
b. Age of annuitant (and age of spouse – if joint life)
c. Gender of the annuitant
d. Purchase Price – Lump sum funds
e. Guarantee period option preferred
f. Escalation rate – if applicable
g. Minimum age: 55 years – This being the early retirement age prescribed
by the government.
h. Maximum age: 75 years
i. Minimum amount: Kshs. 600,000
6. Requirements to sign up for an annuity policy:
a. Enrolment form
b. Copy of ID
c. PIN number
For more information please contact
Gallin Wekesa
0712870447
gallywexa@gmail.com/ gwwekesa@britam.com
(Whatsap Direct https://wa.me/254712870447)