Lump-sum Pension Benefits Vs Monthly Income Streams
The question isn't at what age I want to retire, it's at what income. George Foreman
The need to plan for retirement has never been more critical for Kenyans than it is today. When faced with declining revenues, companies are under a lot of pressure to perform and usually restructure their operations so as to reduce their overheads. A popular solution has been to offer the older and more expensive employees early retirement packages. The main dilemma faced by Kenyans when offered early retirement is whether to take a lump sum amount (the golden handshake) or whether to secure steady monthly income streams either via income draw-down plans or via annuities. A pension income draw-down plan enables you to systematically live off the interest from your retirement savings while preserving your principal amount. An annuity is a contract sold by life insurance companies to provide a guaranteed income from the date of purchase for an agreed period of time. The ‘right’ decision often depends on one`s personal circumstances and investment knowledge level. Factors you should consider during your decision making include:-
Your investment skills - When you are in a pension income drawdown or annuity fund, a professional fund manager makes the investment decisions for you. You get a steady income in spite of the markets fluctuations. Lump sums give you the chance to invest the money on your own. If you have the expertise, you can make more money over the long term investing it on your own; however, you could be forced to adjust your standard of living downwards if you suffer losses.
Retirement Income Vs Expenses - If you are guaranteed retirement income (and your essential expenses, such as food, housing and healthcare costs are roughly equal), the best choice may be to take regular income plans as they play a crucial role in meeting your daily needs in retirement. If your income exceeds your expenses, you could consider the lump sum option as you would only require a portion of it to cover your monthly expenses. The rest can be invested for growth in Unit Trust balanced funds and equity funds.
Your risk appetite - If you are very conservative or uncomfortable making investment decisions, regular income from an interest drawdown or an annuity is likely to provide more safety. The pension is definitely a surer option as investing the lump sum carries the risk of the investments losing value.
Consider inflation - Many annuity payouts are consistently similar and do not increase to keep up with inflation. A lump sum affords you the opportunity to protect yourself against inflation. You could invest part of it in financial instruments guaranteed to keep up with inflation such as some Income Drawdown Plans, unit trust balanced funds and equity funds, stocks or real estate.
Tax Implications - If you take a lump sum payment without transferring it directly to an RBA approved Pension Scheme, your money will be taxed especially if you have not attained the maximum retirement age of 65 years. Alternatively, you could access up to Ksh.600, 000 tax-free on attaining the early retirement age of 50 years. Any amount exceeding this amount has tax implications which vary depending on the benefits payable to you.