Rajnish Kumar, CEO, Fullerton Securities & Wealth Advisors
You need regular flow of money during your retirement years
. One of the ways to get it is to invest your retirement funds with annuity
providers who make monthly payments for a pre-defined number of years. The insurance company invests the money and investors, in turn, are paid at regular intervals.
There are two types of annuities - immediate and deferred. In immediate annuity, the person invests a lump sum and the insurance company starts paying back immediately. Within this, there can again be two choices - fixed (the amount paid will be fixed) and varied (the amount paid will depend on the returns earned on the invested money).
Immediate annuities are suitable for investors who have retired or are nearing retirement
, those needing steady income from the money saved and those who are worried about outliving their savings. In deferred annuity, a person invests systematically for a number of years and allows the investments to grow with time, without attracting any tax.
Annuities are purchased after the accumulation period. Such annuities are suitable for those for whom retirement years are far off and they want to start saving to create a fund that will yield a regular stream of income.
Investors are often in a bind while deciding on which annuity plan to choose. First, there is no clarity on the returns expected from deferred annuity as yields on the investments are uncertain and so is the annuity rate. So, it is difficult to predict what will be the monthly pension that the investment will yield. If the investor is comfortable with such uncertainty, he can go for deferred annuity products.
There is also a dilemma over the the payout modes. Investors struggle to arrive at the best option since there are a number of payout options to choose from. These include annuities payable for life, which are good for someone not having any financial dependant.
The second is payable for life with fixed period guarantees. This is good for someone who needs money for a fixed period after which dependency on pension money will come down.
The joint life and last survivor option works well when income is to be provided to the spouse as well.
Then there is the option of annuities payable for life with return of the purchase price. This acts as an insurance product as well. If the investor were to die early, the nominee would be able to enjoy the amount invested into the annuity.
And lastly, there are annuities payable
for life with fixed-rate increments. This is best for those with a long life. This option works best where the rates are increased according to inflation.
Another question that begs an answer is which annuity provider is the best-suited for you? Once you have chosen the mode of payment and the type of annuity you need, the various products from various providers should be compared on the following aspects:
>> Fees and charges, including mortality charges and asset management and fund management charges.
>> Claim settlement ratio. This is crucial as the insured amount will need to be claimed from the insurance company after death.
>> Ratings of the annuity provider. Ratings of the provider should be checked as annuity is actually an investment with the company it will pay the investor returns on.
Thus, a company with a better credit rating offers lower risk to the money invested as well as the amount to be paid out.
Annuities are purchased after the period of accumulation. Such annuities are suitable for those for whom retirement years are far off and they want to start saving to create a corpus that will yield a regular stream of income.RAJNISH KUMAR
CEO, Fullerton Securities & Wealth Advisors