Buy right annuity plan, retire rich

It served as a poignant reminder of the inevitability of what is a dreaded word for many - retirement.

Indeed, the growing life expectancy in the country poses a challenge - of managing the risk of living long, particularly in a society that is increasingly moving away from the financially secure confines of the joint family system.

However, coming-to-terms can be relatively easy when you have planned for it meticulously during your earning years. In fact, a well-charted retirement process can even act as a springboard for a brighter future, besides ensuring peace of mind.

All you need to do is to save and invest wisely to build a handy sunset-years kitty. Be it creating a corpus through equity, mutual funds and fixed deposits or buying a pension plan. In case of the latter, you will have to undertake the vital task of buying annuities, when the accumulated amount is handed over to you.

PENSION REGIME IN FOCUS

Annuity-buying process gains significance particularly in light of new Irda guidelines on pension plans which have heralded several changes. Under the new regime, among other things, policyholders will not have the choice of approaching the insurer which offers the best annuity rates at the time of vesting.

This has been done to reduce the burden on PSU behemoth LIC, which rules the space at present. This makes it imperative for them to choose wisely while buying a pension plan itself, factoring in the insurer's capabilities.

"A full provider evaluation does become an important factor to be considered upfront when buying a pension plan. In addition, track record in managing the corpus, charges and fees, transaction convenience, payout history, etc, become important to evaluate," While rates are important, your decision cannot be based solely on the ones being offered at present.

"Do note that the annuity rate at the time of buying a pension plan need not be an indicator of what you would get when you need to buy annuities in future." 

So far, nearly 29 products have been filed with the insurance regulator for approval since the new norms became effective from January 1, 2012.

Last week saw the launch of MetLife's deferred annuity, or pension, plan. Also, SBI Life launched an immediate annuity scheme.

CHOOSING THE RIGHT ANNUITY STRUCTURE

Annuities refer to the stream of income an insurer pays at regular intervals until your death or the end of tenure you may have opted for. The corpus at the end of the accumulation phase will be paid out in two parts - 1/3rd in the form of lumpsum, with the remaining being converted into annuities. Now, you need to 'buy' annuities using the amount accumulated by your pension plan or any cash lump-sum. And the annuity option you choose would depend on your requirements and expectations from the plans. This would be applicable primarily to those who may have built the corpus through pension plans until January this year and others with a fund pool. As mentioned earlier, those buying pension plans henceforth will have to settle for the annuities offered by their insurer.

Within the basket of annuity plans offered by your insurer, though, you still have to use your discretion. This would be applicable to everyone looking to buy annuities - irrespective of the date of purchase. "While zeroing in on the right option, you need to ponder upon three questions - what kind of income you would require, whether your annuity requirement would go up or remain the same throughout your life-time and whether you would like to redirect the proceeds to your spouse upon your death," says Pujari of SBI Life. Adds Kapoor of StanChart: "Customers should look at the expected rate of return (annuity rate) net of charges, the period of annuity desired (whether for life, or for a fixed period), flexibility in joint ownership and payout while buying annuities."

KNOW YOUR ANNUITY

After an evaluation of your requirements, you can get down to the business of choosing an annuity option that fits your need best. Broadly, annuity plans are categorised into five segments although the range of options could vary as per the insurer.

ANNUITY PAYABLE FOR LIFE: The annuitant is paid a fixed annuity at regular intervals throughout his life. The insurer stops paying pension after the annuitant's death. This is suitable for those who do not have any obligation post death. This option offers the highest amount of pension for an individual compared to any other options available.

ANNUITY PAYABLE FOR LIFE WITH A GUARANTEED PERIOD: Here, annuity is paid for certain number years, (say the chosen term of 10 years) and thereafter as long as the annuitant is alive. Shorter the guarantee period, higher is the pension. Annuity stops upon either the death of the annuitant or completion of the guaranteed period, whichever is later. This is a simpler tool to ensure income for the family for a stipulated period of time. For example, say the annuitant retires at a time when s/he is still the sole earning member in the family, but expects the kids to take over after five years; such individuals can look at annuity that is guaranteed for five years.

LIFE ANNUITY WITH RETURN OF PURCHASE PRICE: This option could work for those who want to leave alegacy for their nominees to inherit. Here, the annuitant enjoys the pension till s/he dies. After the death of the annuitant, the purchase price of the annuity (that is, the premium paid by the buyer of the annuity) is handed over to the nominee. This is a popular option as both the annuitant and the nominee stand benefited. Some new variants also offer to get the purchase price back in parts.

LIFE ANNUITY INCREASING AT A FIXED RATE : Under this option, there is an increase in the annuity amount payable per year at a certain rate, say of 3-5%. "While it is not linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to an extent," says Pujari.

JOINT LIFE AND LAST SURVIVOR ANNUITY: As the name denotes, annuitant is entitled to receive the pension throughout his lifetime. If the spouse survives the annuitant, the former is also entitled for the pension, ensuring 'life-style maintenance' of the spouse. The buyer can further choose the quantum of pension (50% or 100% of the annuity payable to annuitant) payable to the spouse.

ANNUITY VERSUS OTHER INVESTMENTS

The advantages notwithstanding, you would do well to refrain from putting all your eggs in the annuity nest. "Annuity income is taxable. Therefore, while buying one, you should ensure that your annual income from annuity is within the 'no-tax' limits," says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters. Besides, you can also consider other tax-efficient avenues such as shortterm debt mutual funds or tax-free bonds. "Annuity income is fixed, and if the interest rates move up, you may not get to participate in it.

That makes it all the more important to ensure that you portfolio gets some exposure to instruments that are liquid," adds Navlakhi. In other words, you would be in a secure position if you have allocated your savings amongst a mix of products that complement each other. Remember, while retirement is seldom thought to spell happiness, a carefully planned one will ensure you close your professional innings with your head held high.