EPF mess revealed annuity flaws
Even though the EPF tax has been rolled back, it has resulted in a lot of savers hearing the ter m ‘annuity’ for the first time. An annuity is insurance in reverse, as it’s often said, ‘insurance is protection against dying too early and an annuity is protection against living too long.’
The general idea is that you pay the insurance company a lump sum when you stop earning, and they pay you a certain sum every month, for as long as you live, or for a fixed period.
Taken at face value, the nowdead EPF tax proposal seemed designed not so much to collect revenue, but to force retirees to buy an annuity to obtain a lifetime pension. 60% of EPF withdrawals would have been taxed only if a retiree does not use an annuity.
There’s nothing wrong with the concept itself, but there are two big practical problems. Firstly, of course, an annuity is not a solution that should be forced upon everyone. The second is a bigger issue, which is that the annuities available in India appear to be suboptimal. A typical annuity will pay you about ` 6,000 a month for every ` 10 lakh you pay as premium in the beginning, with some insurers paying a bit more or a bit less.
If you live for 30 years, then annuities available in India run to an effective rate of return ranging from 4% to 7%. That’s just a pittance. Moreover, the same fixed sum every month every year for 30 years can hardly be called a retirement solution because the purchasing power will decline.
IRDA and insurance companies are fine with the annuity options. However, based on the ULIP experience, I think one can say with confidence that these are not organisations that will design customer-friendly products unless coerced into doing so.
If annuities are to play a useful role for Indian retirees, then the annuity marketplace will have to be cleaned up first.