Annuity products are in demand as senior citizens or those closer to retirement seek regular flow of income from their accumulated corpus. However, the product basket of annuities by life insurers is large with various types of annuities and payout options. In order to simplify the world of annuities, insurance regulator IRDA has issued a circular asking insurers to launch a standard individual immediate annuity product -- Saral Pension from April 1, 2021. The insurers are expected to file product details with the regulator by February 2021.
What the product is about
In Saral Pension product, you have to pay a lumpsum as purchase price to get a fixed payment at regular intervals for the rest of your life. It will have two annuity options:
a) Life annuity with 100% Return of Purchase Price
Under this option, annuity is paid for life of the annuitant. In addition, 100 per cent purchase price will be returned to the nominee/legal heirs on death of the annuitant.
b) Joint Life annuity with a provision of 100 per cent annuity to the secondary annuitant on death of the primary annuitant and return of 100 per cent purchase price on death of last survivor.
In this case, the annuity is first paid to the annuitant for life. After death of the annuitant, if the spouse is surviving, the spouse continues to receive the same amount of annuity for life till his/her death. Subsequently, on death of the spouse, purchase price shall be payable to nominee/legal heirs. However, if the spouse has predeceased the annuitant, then on the death of the annuitant, the purchase price shall be payable to the nominee/legal heirs.
The minimum entry age to buy the Saral Pension is 40 years and maximum 80 years. The payout options could either be monthly, quarterly, half-yearly or yearly. Note that annuity payments are taxable in the hands of annuitants as per their income tax slab rate. The minimum annuity amount can be Rs 1,000 per month, Rs 3,000 per quarter, Rs 6,000 per half year, and Rs 12,000 per annum. There is no restriction on the maximum annuity amount.
Loan against policy
Loan can be availed any time after six months from the date of commencement of the policy. Maximum amount of loan that can be granted under the policy shall be such that the effective annual interest amount payable on loan does not exceed 50 per cent of the annual annuity amount payable under the policy. Rate of interest on the loan cannot exceed the yield on 10-year G-Sec (on April 1 of that financial year) plus 200 basis points.
People dislike annuity plans because these are illiquid in most cases. One of the attractive features of Saral Pension is it comes with a surrender option. Only few insurers in India offer such facility and that too after charging a high fee.
The Saral Pension policy can be surrendered any time after six months from the date of commencement, if the annuitant or the spouse or any of the children of the annuitant is diagnosed as suffering from any of the critical illnesses specified in the policy document, based on the documents produced to the satisfaction of the medical examiner of the insurer.
"On approval of surrender, 95 per cent of the purchase price shall be paid to the annuitant, subject to deduction of outstanding loan amount and loan interest, if any. On payment of surrender value, the policy stands terminated," says IRDA in its circular.
Naval Goel, CEO, PolicyX.com says if a person surrenders pension plan before maturity, the entire surrender value gets added to the annual income and taxed as per the tax slab.
Annuity rates primarily depend on the prevailing government bond rates in the market. These are not attractive compared to other investment options, especially in case of return of purchase price annuity options.
"Usually, it is highly dependent on interest rates. As insurance companies have to invest most of this amount in fixed income securities, the rates are decided keeping in view the current interest rates for both short-term and long-term securities as well as some expected fluctuations," says Goel.
"Annuities are nothing but the pension that one draws post retirement. Hence, they are designed to provide customers regular income to meet their financial needs post retirement. Therefore, most annuities aren't structured to encourage surrenders," says Tarun Chugh, MD & CEO, Bajaj Allianz Life.
"The surrender option of Saral Pension is activated only in absolute urgent need by the customer such as when critical illness strikes, which could be essential considering the customer would require the additional funds to manage the expenses due to the illness," Chugh adds.
While the product features will remain similar, the interest rates may differ across insurers.
Should you go for it?
The IRDA has done a great job in simplifying the annuity products, but ultimately you need to compare it with other retirement income options. Considering the fact that interest rates on annuities are lower, one should not put all their retirement corpus in annuities.
"One should consider investment in senior citizen savings scheme that gives you higher interest rate than annuities and tax deduction under section 80-C, although interest income is taxable. Post Office Monthly Income Scheme and Pradhan Mantri Vaya Vandana Yojana can also be considered. If one is willing to take equity exposure, equity savings schemes of mutual fund are a good option too. One may go for fixed deposits and debt funds too, but do your tax planning before investing," suggests certified financial planner Pankaaj Maalde.
The Saral Pension immediate annuities once launched will suit those who would like to leave a legacy for their spouse and children. Typically, one should consider annuity plans only after exhausting the maximum investment limit under small savings schemes.
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