Purchase an annuity, but go for the right variant at the right age: Expert

At present, 40 per cent of the National Pension System (NPS) corpus has to be compulsorily invested in annuities at maturity. According to media reports, the Pension Fund Regulatory and Development Authority (PFRDA) has requested the government to make legislative changes, so that investors may park their money in alternative systematic withdrawal plans (SWPs). Against this backdrop, let us examine the pros and cons of annuities and various other products retirees can use to generate a regular income.  

Annuities help tackle longevity risk. Many people, who have not built an adequate corpus, run the risk of outliving their savings. With an annuity, they can be assured of receiving an income for the rest of their life (though inflation will corrode its value).

Annuities also help tackle reinvestment risk by allowing investors to lock in the interest rate. “Suppose a person buys an annuity that pays 6 per cent at 60. After 20 years, even if interest rates decline to, say, 2-3 per cent level, he will continue to get the same rate,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

These products have a few shortcomings, too. The rate of return can be quite low. “Since annuity providers have to take care of longevity risk, they set rates on the lower side,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. Returns are lower in the return of purchase price option, which is more popular (where the purchaser gets an income for his lifetime and on his demise the principal is returned to his nominee.) The investor also loses access to capital in this option. Income from annuities is also taxable.

Financial planners say retirees may buy annuities, but add a few caveats. “Those who have a considerable corpus, and can live without access to their capital, may invest a part in annuities,” says Dhawan. According to Raghaw, “Purchase an annuity, but go for the right variant at the right age.” Without return of purchase price option offers better returns. Annuity rates also become very attractive from the age of 70.  

Retirees may consider a few other products as well to generate a regular income after retirement. One is Senior Citizens Savings Scheme, which offers a guaranteed rate of 8.6 per cent. It allows you to lock in the interest rate for five years. However, interest income is taxable. An individual can invest Rs 15 lakh, while a couple can invest Rs 30 lakh, which may not suffice.

Senior citizens may also use the Pradhan Mantri Vaya Vandana Yojana, which pays 8 per cent monthly return and 8.3 per cent annual return. It also allows investors to lock rates for 10 years.

Even Public Provident Fund can be used to generate a tax-free income, provided the 15-year tenure has ended. Thereafter, you may withdraw money once a year. If the tenure has been extended with contribution, you may withdraw up to 60 per cent of the balance (on date of extension) over the next five years. If the account has been extended without contribution, you may withdraw any amount once a year.

Senior citizens may also invest in SWPs of debt funds. “There is flexibility to alter the amount withdrawn. If withdrawals begin after three years, investors enjoy long-term capital gains tax treatment, which is attractive to those in the higher tax bracket,” says Ankur Maheshwari, chief executive officer, Equirus Wealth Management.  Government of India bonds and tax-free bonds are other products senior citizens may consider.