One of the problems faced by those close to retirement is how to invest the lumpsum money to ensure a regular income after retirement. In the past couple of years, insurance companies have started offering annuity plans which give different payment options. You can choose the one best suited for you depending on whether you want higher monthly income or to leave some money for your family after your death.
But since this income is subject to income-tax, it should form part of your investment, along with other equity and debt instruments. Senior citizen savings schemes, mutual fund dividend schemes and tax-free bonds are other investments you should look at along with annuity, advise financial planners.
“There are both deferred and immediate annuity plans. Immediate annuity is better because you know what is the rate of return you will get while purchasing the plan. In deferred annuity, insurance will be used as an instrument to create a corpus and that is not a good option. Mortality and other charges will eat into returns and will not be able to beat inflation,'' points out Sridharan S, head, financial planning, FundsIndia.com.
Some of the payment options offered by the annuity plans include lifetime annuity, lifetime annuity with return of purchase price, life annuity – inflation adjusted, annuity for chosen period and joint life, last survivor. The rate of return varies depending on which payment option one chooses.
For instance, in case of life time annuity the rate of return offered is the highest — around 9.5 per cent. This means the income is the highest. But if the policyholder passes away then the policy lapses and family members will not get any money.
In case of lifetime annuity with cashback option, interest rates currently are around 7.5 per cent. These are one of the lowest rates, which means the monthly income will be less. But after the life of the insured, the corpus is returned to the nominee. While this (lifetime annuity with cashback) may seem as a safer option, the fact is that the cost is adjusted in the price offered and returns guaranteed, points out Yashish Dahiya, co-founder and CEO, Policybazaar.com. “It is just another assurance which doesn't translate to much benefit. Rather it is on a costlier side,” he says. According to Sridharan, the lifetime annuity is best suited for those who have no dependants. But for someone who has dependants, the cashback option is better. For inflation adjusted, the payout is increased by a specified purchase to cope up with the increased requirements.
In case of fixed term, the policyholder will get income for a specific period, five, 10, 15 and 20 years. Here, the rate of return varies from 8.7-9.5 per cent depending on the period. It is higher for the shorter period and lower for the higher period. For death during the chosen certain period, annuity is payable till the end of the specified period. In case of joint annuity, last survivor, if something happens to the first holder, the policy continues and the second holder continues to get annuity. Currently, this option has a rate of return of eight per cent.
“Focus on where you are buying the annuity from. This is because of the guarantee being offered. Generally the older annuity providers will have a better rate because of their pool and capacity to take that risk. Again, the rate you will have now will be guaranteed for life,” Dahiya says.
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