A Guide to Annuities

A Guide To
Annuities
A Guide to Annuities

The social and economic

changes we see are
increasingly leading to a
breakdown in the traditional
systems that ensured
security in old age.

WHY PLAN FOR RETIREMENT?

Kenya, like many other nations, is striving to develop

effectively to a level similar to that of industrialized
countries through capitalism; an economic system
driven by private business ownership. This has led
to significant changes in our social and economic
lifestyles; we have had to move away from a
traditional lifestyle to a modern one driven by the
need to increase wealth.
One area of life that has changed drastically is social
security, especially the guarantee of being free from
poverty in old age. In the traditional African society,
social security systems were assured; social norms
and practices ensured that the elderly were taken
care of by younger members of the society.

It is therefore a personal responsibility to ensure

that you have planned for your retirement life to
avoid the “Old Age Trap”.

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A Guide to Annuities

You can’t work

forever. Some people think they can
keep working until death, but
is that really realistic? Health
problems is the number one
reason people retire early, and
we are all more vulnerable as
we age. When you’re young and
healthy, you might think you can
work forever, but spend more
time with older people and this
myth will be dispelled pretty
quickly. This is why it is prudent
to plan for retirement early
enough.

• Government Sponsored Plans: This is through

the National Social Security Fund. Contribution
is compulsory for employers and employees.
There are three types
However, the benefits paid out are often not
of retirement saving
enough to provide for retirement.
plans namely:
• Employer Sponsored Plans: These schemes
are formed by the employers for the benefit
of their employees. It is not compulsory for
employers to form pension schemes. Many
employers in Kenya have not set up retirement
schemes meaning that their employees have to
plan for retirement saving themselves.
• Individual Pension Plans: Employed people
who are not in an employer sponsored scheme
as well as self-employed people can join an
Individual Pension Plan.

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With life expectancy increasing each year, receiving retirement

income for as long as you live is an important consideration. An
annuity gives you the valuable benefit of a lifetime retirement
income.

In general, a retired person needs approximately

60% of their last salary per month to maintain the
existing standard of living during retirement. The
Employees Retirement Benefits Fund can be an
important source of retirement income but it may
not be enough to finance your total retirement
HOW MUCH MONEY DO I needs. A survey by RBA showed that majority of
NEED FOR RETIREMENT? contributors spent all their savings within three
years of withdrawing their pension funds after
retirement. One way of avoiding this, is by using
annuities to provide you with a guaranteed stream
of income for as long as you live.

60%

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WHAT HAPPENS WHEN A
MEMBER OF A PENSION SCHEME
RETIRES?
This depends on the type of scheme. If it is a
pension scheme, one is allowed to take 1/3rd
of the Total Pension Fund as cash (after taxes
have been deducted). The remaining 2/3rds
of the Total Pension Fund is converted into a
monthly pension which is paid to you monthly,
quarterly, half-yearly or annually until death.
In Defined Contribution Schemes, a member
is required to purchase an annuity; after
retirement, the member receives a monthly
payment for as long as they live. In a Provident
Scheme a member is allowed to withdraw their
entire retirement fund once they attain the
retirement age.
HOW ARE RETIREMENT BENEFITS
PAID?
The options available for payment of retirement
benefits are:
1. Payment of pension direct from the
retirement scheme fund
The trustees of a pension scheme may:
• Pay out a monthly pension deducted
from the pension fund
• Debit the fund with full purchase price
and invest the same with a bank and
pay benefits from the account.
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Under this arrangement the trustees are
in charge of the investments, investment
policy and management of assets relating
to the retired employee and also carry
the risk in case the fund set aside gets
depleted while the retiree is still alive.
2. Purchace an annuity policy from an
insurance company
The retiree can purchace an annuity plan
from an insurance company.
This enables you to have a guarateed
income for as long as you live
WHAT IS AN ANNUITY AND WHY
DO I NEED ONE?
An annuity is a contract in which an insurance
company agrees to pay you a stream of income
for life, in exchange for a lump sum payment
(also called a premium contribution). The
insurance company converts the lump sum that
you have into a lifetime income, removing the
uncertainty and problems that you may face
should your financial resources run out while
you still live. You can also buy an annuity plan
that guarantees income for your loved ones
after you die.
You can buy annuities from any life insurance
company which offers annuity products. To buy
an annuity plan, you pay a lump sum premium
to an insurance company just before you retire.
Alternatively, you can make periodic premium
payments until your selected retirement age.
Once you retire, the insurance company will pay
you a monthly income for the rest of your life.
A Guide to Annuities

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A Guide to Annuities

The common types of annuity plans are:

WHAT ARE THE TYPES OF ANNUITIES?
Immediate annuity
In this annuity, the income payments
begin within 12 months after you buy
the annuity. This is a suitable annuity
for those who are about to retire or
have already retired. The premium
is paid as a lump sum at the time of
purchase.

Immediate annuities help to maximize

and protect income for the rest of your
life. In return for your contribution,
the insurance company provides you a
guaranteed pension-like income for the
rest of your life or for a specified period
of time, whichever is longer.

WHAT ARE THE TYPES OF ANNUITIES?

Deferred annuity

For people who would like a guaranteed income,

but do not need to start receiving it right away,
there is another type of annuity known as
a deferred income annuity that can provide
guaranteed income at a future date.

The income payments begin more than 12 months

after you buy the annuity. You may buy this type
of annuity at any time during your working years.
The premium can be paid as a lump sum, which
will be left to accumulate with the insurance
company, or you can make a series of periodic
payments until your retirement.

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Example:
At the age of say 30, you can purchase a deferred
annuity that will begin paying at age 55. You can
choose to either pay a lump sum premium at 30
or make yearly premium payments until you are
54. The lump sum premium paid at age 30 will be
smaller compared with what you would have to
pay if you purchased an immediate annuity at age
54. This is because the premium paid at age 30
will be invested by the insurance company over a
longer period of time.

Deferred annuities can be an effective way to

maximize future income because the longer you
wait to start to receive income payments, the
higher that income will be.

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CHOOSING THE RIGHT ANNUITY

The type of annuity you choose and its benefits I) The amount you pay to purchase the annuity
will determine the amount of income you will
receive during retirement. It is important to check ii) Your age when you purchase the annuity and
all the options offered by various insurance your gender
companies first and then buy the annuity plan that
best suits your needs. iii) The benefits options you choose

The amount of income payment you will receive You can usually choose to have your income
will depend on: paid every month, every three months, every six
months or once a year.

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An annuity contract may

grant a guaranteed period
WHAT IS A GUARANTEED of payment, perhaps
PERIOD OF PAYMENT? five, ten or fifteen years
where a specific payment
amount is assured,
whether the annuitant
survives this period or
not. Sometimes, if the
annuitant dies during the
guaranteed period, the
balance of the guaranteed
payments is paid
immediately instead of
being paid on the periodic
due dates over the
remainder of the period of
the guarantee.

CHOOSING THE RIGHT ANNUITY

Different benefit options

1 Annuity without guaranteed period – pays a fixed regular income for as long as you live.
2 Annuity with a guaranteed period – pays a fixed regular income for the rest of your life, or for the
guaranteed period say 10 years whichever is longer.

For example: A person purchases an annuity with a guaranteed period of 10 years. If he dies after 6
years, the annuity payments will continue to be paid to his beneficiary for the remaining 4 years. If he
outlives the guaranteed period of 10 years, he will continue to receive the income payment for as long
as he lives.

3 Increasing annuity – pays an income which increases each year at a specified rate to partially
protect your income from inflation, for the rest of your life. The starting income for an increasing
annuity is normally lower, but it will provide you with better income some years later in your
retirement period.
4 Joint-life annuity – pays an income for the rest of your life, and then it continues to pay the income
to your spouse for the rest of his/her life, after your demise. However, income to your partner may
be for a reduced amount.

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A Guide to Annuities

HOW ARE ANNUITIES

PRICED?

The factors affecting the pricing of an

annuity include:
• Mortality (Survival)
• Investment return
• Expenses

SAVING FOR AN ANNUITY

Estimating the amount payable
Annuities are priced assuming that
they will pay a specified annuity
You may need to have a savings
benefit e.g. Kshs 1000 per annum.
arrangement that enables you to buy
This information is then used to price
an immediate annuity once you retire.
annuities of different amounts.
Alternatively, if you want to pay a
smaller premium, you may consider
Example:
buying a deferred annuity, where you
To purchase an annual annuity of Kshs
pay premiums earlier in your life which
107.28, payable monthly in advance,
are then invested by the insurance
guaranteed for 5 years at 10% requires
company to accumulate the amount
a lump sum premium contribution of
you will need for your retirement
Kshs 1,000 at age 60 years. This can be
income.
used to calculate annuity amount for
any purchase price.

Women have a higher life expectancy

than men and therefore annuity rates
for women are lower.

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WHO IS WHO
IN AN ANNUITY?

The following are the parties

involved in an annuity contract:

Insurance Company Owner

Issues the contract, provides Makes the decisions about the

contract information, allocates annuity, such as how much money
the money as instructed by the to invest and how it should be
owner and is responsible for the allocated. The owner also names
guarantees. the beneficiaries.

Annuitant Beneficiary

The owner and the annuitant may
or may not be the same person.
Either way, it’s the annuitant’s life
expectancy that is used to set
the amount of future annuity
income.
The beneficiary is the person who
has the right to receive the death
benefit if the owner or annuitant
dies before income payouts begin
or before the guaranteed
period of payment ends.

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WHICH COMPANIES OFFER ANNUITIES?

NAME OF COMPANY PHYSICAL ADDRESS TEL NO. (020) EMAIL ADDRESS

APA Life Insurance Ltd Apollo Center, Off Ring Road. P.O.Box 3641000 insurance@apalife.co.ke
30389-00100 Westland, Nairobi.
Barclays Life Assurance Westlands Office Park, Off Waiyaki Way, +254 700 590 039 barclays.kenya@barclays.com
Kenya Limited Accacia Building, 3rd Floor, Nairobi
Britam Britam Center Mara/Ragati Road. P.O.Box 2833000 info@britam.co.ke
30375-00100 Nairobi.
Capex Life Assurance 5th avenue Office Suites, Ngong Road, Box 2712384/5 capex@swiftkenya.com
Company Ltd 12043-00400, Nairobi
CIC Life Assurance CIC Plaza, Mara Road. P.O.Box 59485- 2823000 callc@cic.co.ke
Company Ltd 00100, Nairobi
Corporate Insurance Corporate Place, P.O.box 34172 Kiambere 2717617 info@cickenya.com
Company Ltd Road, Nairobi, Kenya
First Assurance Company First assurance hse, Gitanga Rd. P.O.Box 2692250 hoinfo@firstassurance.co.ke
Ltd 30064-00100 nairobi
Geminia Insurance Geminia Insurance Plaza, Kilimanjaro 2782000 info@geminia.co.ke
Company Ltd Avenue, P.O Box 61316-00200, Nairobi
ICEA LION Life Assurance ICEA LION Center, Riverside Park, Chiromo 2750000 insurance@icealion.com
Co.Ltd Road. P.O.Box 46143-00100 Nairobi.
Jubilee Insurance Jubilee insurance house, wabera street. 3281000 info@jubileekenya.com
Company Ltd P.O.Box 30376-00100 Nairobi.
Kenindia Assurance Kenindia house, Loita Street. P.O. Box 2214439 kenindia@kenindia.com
Company Ltd 44372-00100 G.P.O Nairobi.
Kenya Alliance Insurance Chester Hse, Koinange street. P.O.Box 2253900 kai@kenyanalliance.com
Company Ltd 30170-00100 GPO, Nairobi.
Kenya Orient Insurance Capital Hill Towers, 6Th Floor Cathedral 2728603/4 info@korient.co.ke
Company Limited Road, Nairobi P. O. Box 34530 - 00100
Nairobi
Liberty Life Assurance Ltd Liberty Hse, Mamlaka Rd. P.O.Box 30364- 2866000 csc@libertylife.co.ke
00100 nairobi, Kenya.
Madison Insurance Madison Insurance Hse, Upper hill Close. 2864000 madison@madison.co.ke
Company Ltd P.O.Box 47382-00100, Nairobi.
Metropolitan Cannon Life Gateway business park, Mombasa Road. 2216602 info@metropolitan.co.ke
Assurance Company Ltd P.O.Box 30216-00100 Nairobi
Monarch Insurance Monarch hse, 664 ole Nguruone Avenue. 4292000 info@monarchinsurance.co.ke
Company Ltd P.O.Box 44003-00100 GPO Nairobi, Kenya.
Old mutual Life Assurance Old mutual Building, Corner hse Mara/ 2829000 omkeny@oldmutualkenya.com
Company ltd hospital Road. P.O.Box 30059-00100,
Nairobi.
Pan Africa life Assurance Pan-African Hse, Kenyatta Avenue. P.O.Box 2247600 customerservice@pan-africa.
Company Ltd 44041-00100 Nairobi. com
Pioneer Life Assurance Pioneer Hse, Moi Avenue. P.O.Box 2033- 2220814/5 info@pioneerassurance.co.ke
Company Ltd 00100 Nairobi

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NAME OF COMPANY PHYSICAL ADDRESS TEL NO. (020) EMAIL ADDRESS

Prudential Assurance 5th Ngong avenue Off Ngong road. P.O.Box 2712591/2/3/6 info@prudentiallife.co.ke
Company Ltd 25093-00100 Nairobi, Kenya.
Saham Assurance Ecobank towers,Muindi Mbingu street. 2218244 info@sahamassurance.com
Company Ltd P.O.Box 20680-00200 City square
Takaful Insurance of Africa CIC Plaza, 3Rd Floor, Mara Road, Upper 254 (20) 2725134/5 info@takafulafrica.com
Limited Hill P. O. Box 1811-00100, Nairobi
UAP Life Assurance UAP insurance company Limited Bishop 2850000 uapinsurance@uap-group.com
Company Ltd Gardens towers, Bishop Road. P.O.Box
43013-00100 Nairobi, Kenya

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Association of Kenya Insurers

AKI Centre, Mimosa Road, Muchai Drive, Off Ngong Rd
P.O. Box 45338-00100 Nairobi, Kenya
Tel: +254 20 2731330-3, 2630295
Mobile: +254 722 204 149, 733 610 325
Email: info@akinsure.com
Website: www.akinsure.com