In an unusual move, the Insurance Regulatory Authority of India (Irdai) has asked LIC to review the return on its flagship immediate annuity product Jeevan Akshay, because it is too high. The regulator wants the insurance company to ensure that returns are in line with yield on LIC’s investments.
“The rates offered by LIC now match that of the 10-year yield. Since LIC also has to incur additional expenses for managing the portfolio, paying distribution charges, etc., they have no choice but to lower the rate,” says Ankur Agrawal, Category Head, Life Insurance, Bank Bazaar.
“It makes sense to invest before the rate comes down, but no need to rush because LIC may take some time to review it,” says Abhishek Mishra, CEO, Bonanza Insurance. LIC is not as proactive as its private sector counterparts but it may not take very long for the rates to come down this time, since the push has come from the regulator. Insurance companies usually review their annuity rates on a monthly basis, so the reduction may happen at the beginning of next month.
Here are the factors you should consider before locking in to very long-term annuity products like Jeevan Akshay.
Returns
Immediate annuity products used to give low returns compared to market rates. However, with the market rates coming down, the returns offered by these products is now comparable with that of others. For instance, the rates available for annuity with return of premium after the death of the annuitant works out to be 6.48% for someone aged 60 (the rate is calculated after adjusting for the 1.8% GST payable when buying annuity). This 6.48% return is similar to long-term fixed deposit (FD) rates offered by SBI.
Restrictions
Although other schemes like Senior Citizen Savings Scheme offer higher yield (8.3% ), there are restrictions on tenure and amount invested (maximum of Rs 15 lakh for 5 years). Another good option is the Pradhan Mantri Vaya Vandana Yojana (PMVVY) by LIC, which also offers 8.3% returns, but here again the time period is restricted to 10 years and maximum amount one can invest is Rs 7.5 lakh. “The main advantage of annuity is that it offers guaranteed rates for life. Every other product comes with some restrictions or the other,” says Deepak Yohannan, CEO, My Insurance Club.
Safety
“Safety is paramount for older investors, so they look for assured return products like annuities,” says Mishra. This is why the rates are comparable to SBI FD rates. If you increase the risk level a bit and go with FDs from a smaller private sector banks, you can get slightly higher returns.
Debt mutual fund is another option that generates similar returns now. However, the returns are not guaranteed and it carries the interest rate risk and re-investment risk. Even if you go with liquid fund, the safest option, there is the risk of returns coming down if broad market rates fall.
Diversification
“Guaranteed annuity for life is a very big positive feature, but that doesn’t mean you should invest everything in it,” says Agrawal. Diversification is necessary because one can’t rule out an increase in interest rate. Experts suggest locking in no more than 33% of your retirement corpus. “Given the falling interest scenario and the fact that the return offered is similar to that of bank FDs, it makes sense to invest around 50% in annuities. The remaining 50% can be invested in other instruments,” says Yohannan.
Taxation
The annuity amount is treated as pension and taxed at marginal rates. However, investors in annuity for life will be at a disadvantage because annuity includes a part of their principal, which is taxable. “Debt mutual funds score from the taxability perspective,” says Amol Joshi, Founder, PlanRupee Investment Services. Since the capital gains from debt mutual funds are taxed at 20% after indexation, the tax incidence is lower. Therefore, this is a good option for investors in the highest tax slab. However, the tax incidences of debt mutual funds have been going up in recent past.
Age
You are eligible to buy annuities from the age of 30, but it pays to wait, especially if you opt for annuity for life, since the rates increase significantly with age. However, this holds only if the interest rate structure remains stable in the interim.
Though rates move up slowly with age for return of premium annuities as well, the difference is very low, so it doesn’t make sense to wait. “The decision to lock in should be based on age and the rates available. Since the rate offered is good and expected to fall further, this is a good time to invest,” says Agrawal. However, younger investors also need to consider the issue of taxability before the take the plunge.
