Opting just for annuities won't help you in retirement

It is a well established fact that planning for a financially secure retirement is most effective when you begin saving and investing early and stick with the plan. And, one of the best ways to ensure a safe and secure retirement is to have a retirement plan in place from the moment you take up employment. While contributing to pension plans by way of provident fund is a given for the salaried, there are several other ways in which you can save and invest towards your retirement. But, that is all to build what is known as a nest egg or a retirement corpus that will see you through retirement.

The post retirement income
One of the investment vehicles that insurers offer as a tool for financing your retirement is a class of plans known as annuities. Offered by insurers, these exist in two formats - deferred annuity and immediate annuity. The immediate annuity is what retirees look for to create that much needed income in retirement. With an immediate annuity, the payments start the same year you buy the contract. Under an immediate annuity scheme, you hand over a lump sum (say, your superannuation benefits) to an insurer and choose the periodicity of payments and the number of years for which you want a pension. You will need to choose the time period for which you need the annuity based on your assessment of the number of years you think you will live.

However, you are liable to tax (at appropriate slab rates) on the annuity that you receive, which is treated as income. All things considered, annuity schemes offer retirees the possibility of setting up an income stream without having to actively manage their investments. They come at a cost, and with some investment limitations, so it's important to know your mind-and your needs-before you enter into a long-term investment contract. There are several annuity options available these days which come as annuity for life, variable annuity and options which continue the annuity for your dependent spouse if need be.

The tax efficient option
Retirement is a time when even the smallest of sums going towards taxes would hurt one emotionally and financially. To counter this effect, one should look at creating income streams in retirement that are tax efficient. Although the choice to have equity exposure with one's retirement corpus may seem a bit too risky, not having one could be a bigger risk in reality. If one has never been in equities till such time as their retirement, the thought of putting in the money for their sunset years into equities may sound very appalling. Yet, there are relatively less risky options that one must consider now.

The retirement corpus should be ideally bucketed into money that will be needed regularly, money that will be needed infrequently and money that will not be needed indefinitely. For the immediate regular stream one could consider annuities and for the infrequent sum the choice of near cash instruments like debt funds and liquid funds will prove to work well. For money not needed for the indefinite future, one should look at putting it away in a balanced fund and look at ways to make systematic transfer of this money to the liquid fund to create the necessary stream for the infrequent money.

Not only will such a structure act as a tax efficient system, it will also create the possibility of growth for the retirement corpus instead of it being used only as a depleting source. The choice of the option is left to you, but given the limited choice with annuities and the poor rate that they offer, your chances will be better in taking the initiative to better manage your retirement income by using options other than annuities.

olmdesk@outlookindia.com