Stagger annuity purchases as returns improve with age

Buying in tranches will also help you deal with interest-rate risk

A retiree runs the risk that she could outlive her retirement corpus, and only an annuity can protect against this. There are many plans one can consider, including Aditya Birla Sun Life Insurance’s (ABSLI’S) recently launched single-premium plan that offers a pension to retirees, called Guaranteed Annuity Plus. Other insurers also offer annuity plans (see table).

“Amid higher life expectancy, an annuity allows a person to generate a regular income during retirement,” says Kamlesh Rao, managing director and chief executive officer, Aditya Birla Sun Life Insurance. Adds Bikash Choudhary, appointed actuary and chief risk officer, Future Generali India Life Insurance: “The annuity amount promised at inception is guaranteed for as long as the buyer survives.”

Low rate of return

The rate of return offered by annuities can at times be lower than that offered by bank fixed deposits, and schemes for the elderly like Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizens Saving Schemes (SCSS), both of which offer 7.4 per cent.

However, with products like fixed deposits (usually up to 10 years), PMVVY (10 years), and SCSS (five years), the rate of return can be locked in for a limited period. The retiree faces reinvestment risk in all of them. If rates are low when these products mature, the retiree will have to accept that. With an annuity, the buyer can lock in the current rate for their lifetime. Hence, a part of a retiree’s income-generating portfolio should be invested in annuities.

Both in PMVVY and SCSS, a retiree can invest up to ~15 lakh.

Annuities don’t have such caps.

People retire early nowadays—before they turn 60. They can invest in annuities for regular cash flows. “Both PMVVY and SCSS can only be availed after 60 (above 55 in SCSS for those who have taken voluntary retirement),” says Raj Khosla, founder and managing director, Mymoneymantra.

Tight lock in

A person who invests in annuities does not get his principal back. Says Suresh Sadagopan, founder, Ladder7 Financial Advisories: “The money is available only to the next of kin after the annuitant’s lifetime

(in the return of purchase price, or ROPP, option).”

An annuity also does not provide a safeguard against inflation. It pays a fixed amount (except in the increasing annuity option), whose purchasing power gets eroded over the years by inflation.

A buyer who purchases the without-ropp option faces the risk that if he passes away early, his money gets wasted.

The income from an annuity is taxed at the retiree’s slab rate. However, the basic exemption limit is higher for senior citizens (~3 lakh) and super senior citizens (~5 lakh). Retirees who don’t have a high income could escape paying tax.

Annuities also carry interestrate risk. If a person buys them at a time when interest rates within the economy are low, he will have to accept those rates.

Compare rates

Annuity rates vary from one insurer to another. “Check the payouts of different players and go with the one that pays a higher rate for the longest period,” says Naval Goel, founder and chief executive officer, Policyx.com. Purchasing online can also help get a better rate. A person can also earn a higher rate by opting for the without-ropp option.

Avoid buying a plan that terminates at a certain age. Buying a joint annuity (which will continue to make payouts to the spouse after the buyer’s death) is advisable.

Stagger your purchases instead of buying at one go. Annuities offer better rates at higher age. Staggering also takes care of interest-rate risk.