Primer. Annuities for a secure retirement

Retirement is a major milestone in one’s life. But going from a full-time job to no job can shake you off your financial security if you don’t plan for your post-retirement years. As it is necessary to have a continuous flow of income after retirement, one can consider immediate annuity plans.

Typically, one can get an immediate annuity by paying a single premium. From the time you start, annuity is guaranteed to be payable either yearly, half-yearly, quarterly or monthly.

There are broadly two varieties of immediate annuities available — annuity with return of purchase price and annuity without return of purchase price, which ceases on your passing away.

There are also quite a few variations on these plain vanilla-type plans, such as annuity plans that offer an income that rises at a certain rate every year, annuities that return only a part of the purchase price, and so on.

Both LIC and private sector insurers offer immediate annuity products.

If your aim is to secure your retired life by getting the maximum possible income, the plain-vanilla type annuity, without the return of purchase price, will be your best bet. Let us understand this with some examples.

Currently, a policy such as Jeevan Akshay VI from LIC, for the premium payment of ₹10 lakh by a 60-year-old individual provides an annuity (without return of purchase price) of ₹93,650 a year (₹7,450 monthly). For the same sum and the same age, private players such as HDFC life offer yearly annuity of a slightly lower ₹86,500.

But in case you go for annuity with return of purchase price, LIC gives you only ₹70,350 per annum; HDFC Life provides an even lower ₹67,500 per annum.

Annuities with the clause that income will rise by a certain percentage every year may be tempting. But keep in mind this is only simple interest and may not fully cover the rise in inflation. This is also the case with annuities that offer a return of the purchase price to your nominee.

Apart from bringing down your monthly inflow quite sharply, the same amount, if returned to them after 20-30 years, may not mean much to your nominee, after taking inflation into account.

Going through the online route to sign up for an immediate annuity plan could be advantageous as some insurers may provide slightly higher rate. However, note that the minimum amount to be paid as single premium could also be higher in this case.

According to Suresh Sadagopan, Founder, Ladder 7 Financial Advisories, annuity products will suit people with limited financial knowledge and low risk appetite.

Once the premium is paid and the annuity is set up, it remains a hassle-free way of earning monthly income until one’s death. Yet, there are a few factors to consider before zeroing in on a policy.

For one, it is imperative to decide the age at which you would want to receive your annuity, as it impacts the returns. Annuity rises with age. For instance, a single premium of ₹1 lakh for lifetime annuity without return of purchase price in LIC would fetch ₹11,650 (yearly) for a 70-year-old compared with ₹8,930 (yearly) for a 60-year-old.

Similarly, the interest rate offered is another criterion while selecting an annuity.

Annuities are not high-return products per se . The best rates currently offered are around 7 per cent. But the rate varies with age, ticket size (amount of premium paid) as well as the time at which you enter into the annuity product.

An entry at the peak or closer to the peak of the rate cycle in the economy will fetch better returns.

Thirdly, you need to keep in mind that annuity income is taxable. For instance, if you earn 7 per cent return on the corpus and you fall under the tax bracket of 20 per cent, the post-tax rate comes down to around 5.5 per cent.

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