2020 has been a difficult year for many, especially for retirees or those closer to retirement. The retirement phase calls for investing accumulated corpus in financial avenues to ensure a regular stream of income. With interest rates at multi-year lows, retirees do not have enough risk-free investment options to generate a regular flow of income. At such an uncertain time, annuity plans by insurers could be a safer mode to ensure a regular stream of income. But with safety comes low returns. The interest rates on annuities are hovering around 5-6 per cent. That said, annuities may not form a substantial portion of your retirement portfolio, but if you are a risk-averse investor, it does find a place for a stable flow of income.
How do annuities work?
Retirement planning includes two key phases. You accumulate corpus while you are earning and invest the same post-retirement to receive a regular income. "While every individual aims to continue the same standard of living post-retirement, as before retirement, their risk-taking ability becomes low or nil in absence of a regular income stream. Here is where an annuity will be useful. One can plan and save for retirement corpus during the earning years and use this sum to buy an immediate annuity product. As the annuity income is guaranteed, it is not impacted by any market fluctuations, which makes it an ideal investment option for a senior citizens," says Dheeraj Sehgal, Chief Distribution Officer - Institutional, Bajaj Allianz Life Insurance.
Types of annuities
The two basic types of annuities include deferred and immediate annuities. In deferred annuities, you keep making regular payments for a while or pay lumpsum amount in advance before the deferred income phase starts. This is for people closer to their retirement. If you have already retired and seek monthly flow of income immediately, you may go for an immediate annuity in which you'll have to make a lumpsum payment to buy the annuity plan.
Further, there could be lifetime guaranteed income plans or the ones with the fixed term annuity of say five, 10 or 15 years. Lifetime plan will have a lower payout compared to the fixed payout option. In lifetime guaranteed plans, you may go for single life annuity or a joint-life annuity. Needless to say, single life annuity comes with higher annuity amount.
Typically, all annuities come with the fixed payment option, if you want to factor in inflation, you may go for increasing annuity plan. However, the initial payout could be quite low in increasing annuity option.
Another popular annuity type is return of purchase price, in which the initial corpus used to purchase the annuity is returned to the nominee (after the death of the annuitant).
Kotak Lifetime Income Plan, which has seen 40 per cent year-on-year growth is a single premium immediate annuity plan. "It has multiple annuity options to suit different customer preferences - Lifetime Income; Lifetime with Cashback; Joint Life annuity options and Term Guarantee annuity options. The most popular option is Lifetime Income with Cashback i.e. annuity during the lifetime of annuitant and refund of purchase price to the nominee upon death of the annuitant," says Suresh Agarwal, Chief Distribution Officer, Kotak Mahindra Life Insurance Company.
Which annuity plan to choose
The decision depends on an individual's family needs. If you have a working spouse and financially independent children, you may go for an annuity with a single life cover. But if you have a non-working spouse or you want to leave behind a legacy for your children or grandchildren, joint life with return of purchase price will be a better option. However, the annuity amount will be lower in the second option.
"The issue in single life cover without cashback is if death happens in just 10 years, then you are at a loss because you didn't get pension for a long time against your retirement corpus," points out Vivek Jain, Head of Investments at Policybazaar. So, if you are going for a single-life annuity, club it with the fixed term payout option. In that case, the payout amount will be higher.
Depending on your needs, you may go for monthly, quarterly, half-yearly or annual flow of income too.
Jain says the interest rates on various annuities are around 6.1 to 6.2 per cent, depending on the type of annuity plan chosen. LIC Jeevan Akshay Pension Plan and LIC Jeevan Shanti are the two most popular annuity plans. Below are popular annuity plans by private insurers:
Should youngsters go for annuities?
Unless you receive a good chunk of money with which you would like to generate a second source of income, annuity plans for youngsters are not a recommended option. "This is because the annuity amount for a given purchase price is generally lower for individuals in their 30s compared to a retiring individual in their 50s or 60s," says Sehgal of Bajaj Allianz Life Insurance.
Young investors should rather invest in high-yielding investment avenues like equities in the accumulation stage to collect substantial corpus by retirement. "Though our annuity plan is available to customers of age 45 years and above, typical age group of annuity customers is around 50-55 years and above. Annuity plans are ideally suited for individuals of that age group as that allows them to plan for regular pension amount closer to retirement and also gives better annuity rates," says Agarwal of Kotak Mahindra Life Insurance.
Should you buy annuities now?
No denying that the interest rates on annuities are nothing to write home about. But one never knows the interest rates may go even lower.
"Look at any developed markets, interest rates have only gone down historically. In India, in 2001-02, interest rates used to be 11-12 per cent in FDs. In last 20 years, we have never seen a major upside in interest rates. In all probabilities, an interest rate of 5 per cent reaching to 7 per cent is unlikely. This is why annuities are a good option for people in their 60s as the flow of income will remain static until they are alive," says Jain of Policybazaar.
So, should you lock in your money at existing rates for the lifetime? Not necessarily, at least not the entire retirement corpus. Inflation is here to say in a developing country like India. Hence, a higher interest rate cannot be ruled out. That said, don't put all your eggs in one basket. Part of your portfolio may go into annuities to avoid reinvestment risk of fixed income instruments. The rest of retirement corpus should be routed in high-yield investment options such as small savings schemes, bank fixed deposits, balanced mutual funds and debt funds.
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