At a time when interest rates on fixed deposits are falling, getting an assured income for retirees for the rest of their life has become challenging. Purchasing annuity from life insurance companies is certainly one solution they can look at for a regular cash flow after retirement.
An annuity is a guaranteed amount paid for a subscriber’s lifetime. While insurers offer various types of annuity products ranging from pension for life, pension to spouse on the death of the annuitant, there is no provision for surrendering the policy in case of any need for money for any emergency. There are options where the corpus is returned to the legal heir of the investor only after his death, but this lowers the effective returns.
Annuity plans are suitable for risk-averse investors who do not want to park their retirement savings in equity-related instruments. B Srinivas, head of products, ICICI Prudential Life Insurance Company, says annuity products by life insurance companies are ideal for taking care of retirement needs since they are not vulnerable to factors like market volatility and changes in interest rates. “Annuity products provide guaranteed income for the whole life of the policyholder thereby enabling them to be financially independent in their golden years,” he says.
Sanjay Tiwari, director, strategy, Exide Life Insurance, says it is important to decide on the savings scheme to accumulate the wealth which can be turned into an annuity at a later stage. “Life insurance is an option that offers dual security, for mortality as well as longevity. During the accumulation phase, in case of the unfortunate death of the investor, the family is paid out a lump sum which will be 10 times the annual premium. This tax-free amount can also be converted into an annuity as per the customer’s choice. In case the investor lives through the accumulation phase, he can enjoy the benefits of lifetime income by converting the maturity amount into an annuity,” he says.
Life insurers offer two types of annuity plans—deferred and immediate. In the immediate annuity plan, the investor pays a lumpsum amount to get pension payout at regular intervals like monthly, quarterly, half-yearly. This is suitable for those who have received a lumpsum like gratuity or from Employees’ Provident Fund after retirement or have accumulated a corpus. In deferred annuity plans, an investor accumulates money with the insurance company by investing in a pension plan and then gets pension or regular payouts after retirement. Deferred annuity also offers the customer the option to withdraw one-third of the corpus tax free as a lump sum and convert the remaining two-third into an annuity.
Srinivas says a person in his late 40s or early 50s, the deferred annuity plan is the suggested option. “On the other hand, for a person who is close to retirement, an immediate annuity would be best,” he says.
Similarly, Tiwari recommends that one should start investing for retirement as early as in the 20s. “Starting early doesn’t put much strain on liquidity and eventually results in a huge corpus which can be converted into annuity. Hence, individuals at their early stages of life could consider going for deferred annuity options instead of immediate annuity. However, if someone is not able to regularly save at the early ages, immediate annuity at the time of retirement would be better as it allows one to purchase the plan and start receiving a regular income immediately,” he says.
As short-term interest rates are higher than long-term rates, it becomes challenging for insurers to pay higher rates for annuities as they are long-term payments. As long-term bonds are not always available in the market, insurers have to take the risk of reinvesting at low rates. As a result, annuity pricing becomes higher and many investors find the current annuity rates unattractive.
Experts suggest that insurers as well as annuitants can get better benefits if there is some amount of risk-sharing between the insurer and the annuitant. Investors must look at the financial stability of the insurance company and buy annuity products from a trustworthy brand.
