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Saturday 4 August 2018

Should you buy an annuity?

Today I got a call from one of my relative. He needs some suggestions on one of his investment in pension plan. He paid the premium for 10 years. Now he has only two options as withdrawal or invest in Annuity plan offer by same company. Annuity is an product that pays income on regular basis.  and can be used as a part of retirement planning.most of annuities do not provide life insurance cover. Instead they offer you a guaranteed income either for life or for a defined duration.

Retirement is an inevitable stage for every working individual. An annuity provides the security that investor will continue to receive money on regular interval for the rest of your life. investor may choose to receive your fixed payouts at intervals that suit him best - monthly, quarterly, half-yearly or annual. The biggest advantage that annuities offer is that they eliminate the re-investment risk. The risk is that when you go to reinvest the principal, you may get a lower rate of interest.Other monthly income paln such as the Post Office Monthly Income Scheme (POMIS) come with reinvestment risk. But in Annuity plan we have guaranteed the same rate of payout for life or paymnet duration.

While annuities do provide a guaranteed sum of money, and hence security and stability to retirees, they have a few disadvantages too.

According to Irdai rules, pension plan investors have to use 67% of the corpus to buy an annuity from the same insurer they bought the pension plan from. Investors do not have the option of buying the annuity from another insurance company, which might be offering better rates. NPS investors too have to use 40% of their accumulated corpus to buy annuities. The only advantage is they have the option of going with the best annuity provider.

Investor has no access to the capital. Premature withdrawals not allowed in annuities plans. Annuities do not allow premature withdrawal. if there is any emergency then investor must use some other option.

Lower rate of return. The returns (annual) on annuities have not been that attractive(It is between 6 to 7%) as compared to other products. It even less than the bank FD. with this ROI it can not fight inflation. Prices will continue to rise even after retirement.

Diversification is very important aseact of every investment plan. we should not put all eggs in one basket. We should not put all of our retirement savings in an annuity plans. Retirement corpus should be used to have following goals

  • Regular income which should Combat inflation.
  • Create an emergency Fund to meet emergency or unexpected expenses. 


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