Advantage Annuity

Paramhans Singh’s first task after retirement was to carefully invest his retiral benefits in a regular income scheme. He wanted secure and guaranteed returns. “I opted for an immediate annuity plan. My monthly expenses are Rs 20,000 and accordingly I invested around Rs 30 lakh. While other investment instruments have the potential for good returns, there is always some risk attached,” he explains.

An annuity insurance plan helps in getting a regular life-long income on making a one-time lump sum or regular investments. “Annuity is a life insurance product designed to offer a regular income post-retirement, similar to a pension. Annuities can be purchased through lump sum or a series of premiums,” says Aalok Bhan, Director & Chief Marketing Officer, Max Life. “These plans allow customers to achieve financial independence and help in leading a comfortable life.”

Why Choose A Plan?

According to World Bank, the average life expectancy in India has gone up from 63 years in 2001 to over 69 years in 2018. Since Indians typically retire around the age of 58-60 years, there is more life left after that. Hence, an Indian needs substantial retirement savings to lead a comfortable
retired life.

Annuity helps in building a corpus and ensures a regular flow of income even if other means get exhausted in medical or other emergencies. “As one grows old, health issues and emergencies can significantly dent into retirement savings. An annuity plan helps in this regard,” says Karthik Raman, CMO & Head (Products), IDBI Federal Life Insurance.

Annuity Vs Others

Mutual funds and equity are attractive options when you are planning to build a retirement corpus. However, it is almost impossible to make predictions about the gains that one can make. The ongoing pandemic and subsequent economic slowdown’s adverse impact on market-linked investment avenues have badly affected investor confidence.

In such a situation, annuity plan creates a shock absorbing financial foundation regardless of market fluctuations. Due to the increasing life expectancy and fluctuating market conditions, annuity solutions are particularly important for achieving financial independence during the retired life. Empirical evidence shows that 10-year bond yields have fallen over the last two decades in India.

Safeguarding one’s retirement income from fluctuations, thus becomes imperative. Therefore, locking into guaranteed income through annuity solutions sooner rather than later makes ample sense,” says Samit Upadhyay, CFO and Head (Product), Tata AIA Life Insurance.

You must buy an annuity plan while diversifying portfolio. This allows you to create emergency funds for medical crisis or other family needs, which ask for heavy spending and where annuity income may not suffice. “At the time of deciding a suitable corpus, it is important to factor-in and reserve a lump sum amount for unforeseen expenses like hospital, future obligations and debt,” says Anil Kumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance.

Investing in equity or mutual funds could be a better option when you are young and have time before retirement. Market-linked instruments fetch good returns over a long period.

Immediate Or Deferred

Broadly, there are two types of annuity—immediate and deferred. In the former, the income starts as early as next month, and the latter allows you to defer the payouts by a decade and half. If you are nearing retirement, opt for immediate annuity. Otherwise defer receiving payments and let the principle compound into a significant amount of interest.

“In the last three years, deferred annuity has emerged as a new sub-category, wherein the customer can choose a guaranteed income in the future. This has expanded the annuity market to slightly younger ages, who can now start locking into a future retirement income, while still earning,” shares Upadhyay.

Payout Plans

You can choose to receive annuity amounts yearly or monthly for most products. But the payment varies due to different terms and conditions. One of the common products is life annuity, where payouts continue during the lifetime of the annuitant and cease on death. In joint life annuity, after the annuitant passes away, the spouse/children can continue to receive payouts.

In guaranteed life annuity, payouts are made for a fixed period of five to 10 years. Payouts are given to the nominee, even if the annuitant passes away. If the annuitant survives the period, the payouts continue till the end of lifetime. In growing annuity plans, payouts grow annually, generally by 3 to 5 per cent. This helps in beating inflation. In all these payout methods, a return of purchase price option is available

Many Advantages

Guaranteed income: The annuity rate once fixed, continues for life, working as an assured income during post-retirement phase.

Options for spouse, children: In joint annuity plans, the spouse or children continue to enjoy the benefit even after death of the policyholder. Those wanting to leave a legacy can use the return of purchase price option, where the lump sum used to purchase the annuity is returned to the nominee in case of death of the annuitant.

“The benefit of this category is that it offers fixed income for life. Further, there are unique features like joint life option, where the spouse continues to receive the income in case of death of the annuitant,” says Srinivasan Parthasarathy, Chief & Appointed Actuary, HDFC Life.

No fear of outliving investment: Imagine a situation where you miscalculate how much money you need post-retirement and end up finishing the fortune well before time. With annuity, you are safe.

No reinvestment risk: You will not need to reinvest the corpus to ensure growing your wealth. This is beneficial as interest rates for most investment tools diminish regularly. “There is no reinvestment risks in annuity as the returns are guaranteed for lifetime and are not volatile like investments in fixed instruments or highly-rated corporate bonds,” adds Bhan.

Tax saving: Most annuity plans offer tax benefits under sections 80C and 10D of Income Tax Act.

Some Disadvantages

May not beat inflation effectively: A flat annuity may not be able to beat inflation spikes. One can opt for growing annuity to factor-in inflation. However, the drawback is that the amount starts at a much lower level than flat annuity.

No withdrawal: Annuity is like a one-way street, where withdrawal is not allowed. The purchase price will be returned to the nominee after the demise of the annuitant.

Limited rate of returns: Annuity returns are limited in nature. These fixed payouts may not match the rate of returns in market-linked tools.

Way Forward

You should have an estimate to meet your post retirement expenses. An amount that provides substantial income, and takes  inflation into account, should be ideal. Make the right calculation before you invest.

nirmala@outlookindia.com