Annuity may not be the solution for your retirement
Annuity plans cover the financial risk of “living long” by providing adequate payments for a comfortable lifestyle.Updated: Jun 04, 2019 12:24 IST
Annuity plans have long been advocated for retirement planning to get regular income. “Annuity plans are designed for providing guaranteed income during one’s retired life to achieve retirement goals,” said Dheeraj Sehgal, chief distribution officer–institutional, Bajaj Allianz Life Insurance. However, does it work for you? Let’s take a look at the product structure and what it entails:
WHAT IS ON OFFER?
You may purchase the annuity through a lump-sum payment or a series of payments over time. “An annuity contract terminates on death of the annuitant or continues for his spouse till her death as per the option chosen by annuitant,” said Mohit Garg, product head, PNB Metlife India Insurance Co Ltd. Annuity plans cover the financial risk of “living long” by providing adequate payments for a comfortable lifestyle.
“There are primarily two kinds of annuity products: immediate annuity plans – under which you pay single premium and start getting periodic payments immediately and deferred annuity plans – which has an accumulation phase. Your premium is utilised to build up a corpus and the annuity payouts starts after the end of accumulation phase. The annuity rate may be guaranteed upfront or may be determined at the annuity payout stage,” Sanjeev Pujari, president- actuarial and risk management, SBI Life Insurance.
The insurance regulator recently upped the withdrawal limit on annuity products earlier this week. On pension products, you can withdraw up to 60% of the amount and the rest can be used to purchase an annuity product. Earlier investors could withdraw one-third of the amount. The minimum investment amount for an annuity product varies across insurers. There are recent products launched which allow you to invest as low as ₹2,000 monthly. Liquidity is limited in an annuity product as withdrawals are not permitted.
“Lack of liquidity or flexibility is a criticism faced by annuity products. Also the taxability of annuity amount is an issue which is debated,” said Pujari. Until maturity, it is treated like a taxfree product but post-maturity annuity product is treated like income and is applicable for income tax.
“The returns on such products are generally low because annuity products invest in government securities which have interest rate of around 7-8% and insurers may have to take on the investment risk,” said Kapil Mehta, founder, Securenow.in. This takes a toll on what you receive from the plan. There is no fee or charge in annuity products. “The charges are subsumed in the returns and that’s why the returns are so low. Unless, in case of unit link pension plans, the charges are visible,” said Sadagopan.
Garg said, “Like all insurance contracts, annuity products also carry implicit charges loaded by the insurance company. These include the provision for expenses, commission paid to the distributors, longevity and risk. The charges levied by insurance companies vary as per the operating philosophy, except the commission payable, which is capped at 2% of single premium.”
IS IT FOR YOU?
This product becomes disadvantageous for your own money in a few instances. “The returns are any way low and when you are taxed over and above low returns what you effectively get may be in the range of 4.5%,” said Sadagopan. As a retirement product this may not be the best option when you have other products available as well. “In fact, most investment products can be structured to suit your retirement needs,” he said. “If you are a risk-averse investor, who is satisfied with returns in the range of 6%, then annuity may be suitable for you,” he added.