Annuities : An alternate to cash lump sum at retirement

By Mary Gitau
You've spent years putting money aside into a pension scheme, but what actually happens once you retire? Sadly, it's not as simple as just withdrawing the money. You must now convert your pension pot into an income that will last you for the rest of your life. This can be achieved by buying an annuity from an annuity provider.

What is an annuity?
“It is a series of payments which may be subject to increases, made at stated intervals (monthly, semi-annually, or annually) until a particular event occurs".

This event is most commonly the end of a specified period or the death of the person receiving the annuity.

What factors affect your annuity rate?
An annuity is a financial product where you exchange a lump sum for periodic income. How much you get between the periodic intervals will depend on a number of factors: These will include:
Your savings-The accumulated amounts that you have managed to put into your pension 'pot' over your working years will determine the amount receivable at set intervals. Currently the law allows you to take one lump sum payment if periodic amounts are below Kshs.6,105 per month.
Your Age- The younger one is, the expected periodic payments will be longer and hence the lesser the monthly amounts payable.

What about your health?
If you're in poor health, annuity providers will assess that you have a lower life expectancy and thus, a shorter period for them to pay out for compared to a healthy person.
The annuity rates offered by individual annuity providers - There are different annuity providers and much competition in the annuity market, so rates can vary between providers. When you're planning to buy an annuity, it's essential that you shop around for the best rates before settling for an annuity provider.

Who should buy an annuity?
Annuities are only suitable for members of defined contribution pension scheme; defined benefits schemes have an inbuilt annuity plan by design. It is important for members to look at the design of the scheme from the Trust Deed and Rules.
There are different kinds of annuity plans available, immediate annuities provides payments usually a month after retirement age or one year after retirement age. Deferred annuities anticipated delayed commencement dates for future payments usually some years in the future. Joint annuities provides for periodic payments to continue until the last surviving spouse or children, while temporary annuities are subject to survival for a limited period of years or until the annuitant attains a specified age for example 70 years.

Tips while buying an annuit
Make sure you do your research and/or seek advice from the providers/administrators.
Once you've bought an annuity there's no going back, so you've got to get it right first time. Depending on the provider you go to, you can increase your income by up to 20% just by shopping around.

Ms Gitau is Pension Administrator,
Chancery Wright Insurance Brokers Ltd