A lifetime plan 'with a return' of investment corpus typically has a lower payout compared to the option for a shorter period 'without a return' of investment corpus.
When you want a regular income on your investment, you look for financial products that come with either monthly, half-yearly, quarterly, or annual payment options. The popular ones offering a regular income are bank fixed deposit, post office monthly income scheme, SCSS, or PMVVY.
One common theme among all of them is that they are for a fixed period. At the end of the chosen tenure or after 5, 10 years, the principal amount is returned to the investor. The regular income is paid only for a fixed period to the investor.
However, there’s another investment that only carries a fixed return but also keeps providing a regular income till lifetime. Here, we are talking about the Immediate Annuity plans, let us see how they work, their features, benefits, and the watchouts.
The Immediate Annuity plans are only offered by life insurance companies and on paying a one-time premium called the Purchase Price, the investor starts getting a regular pension till lifetime. The pension is guaranteed and one can have it on a monthly, half-yearly, quarterly, or annual basis.
Immediate Annuity plan returns
The popularity of Immediate Annuity plans has increased lately mainly because of the low-interest rate environment where banks are offering around 5.5 per cent over 5 to 10 years duration. For a 55-year investor, putting in Rs 10 lakh in Immediate Annuity plan, under the ‘Get lifelong pension with lump sum amount returned to nominee’ pension option, the average return is about 6 per cent per annum till lifetime. For younger investors, the returns will be more in Immediate Annuity plans.
The return to the investor will, therefore, depend on pension or annuity options. “Returns from these plans differ according to tenure you select and whether you want the investment corpus back or not at the time of maturity. For instance, lifetime plan with a return of investment corpus typically has a lower payout compared to the fixed payout option for a shorter period without return of investment corpus,” says Rishad Manekia, founder and MD, Kairos Capital
How Immediate Annuity plans work
There are several life insurance companies and you can choose the Immediate Annuity plan of anyone like LIC, HDFC Life, SBI Life or ICICI Prudential life insurance company amongst others. You have to invest a lump sum amount, choose the pension option and start getting an annuity from the very next month or a quarter as per your choice. The pension continues for a lifetime and then it may even continue for a lifetime for the spouse depending on the option chosen.
The biggest advantage is that of getting a guaranteed pension till lifetime irrespective of interest rate going up or down in the future. The re-investment risk, which exists in bank fixed deposits is taken care of in the Immediate Annuity plans. “One of the prominent reasons why annuity plans are the most preferred choice of customers over other retirement plans is that the customers can lock-in the interest rate being offered not just for a period of 10/15/20/25 years but for their entire life,” says Vivek Jain, Head-Investments, Policybazaar.com
Secondly, there is no investment cap in Immediate Annuity plans and one can invest any amount in them. “While there are investment caps in many other retirement plans, there are no such investment caps/limit on annuity plans,” adds Jain. The maximum that one can invest in Senior Citizen Saving Scheme (SCSS) is Rs 15 lakh while in Post Ofice Monthly Income Scheme (POMIS), the maximum amount allowed under the joint name is Rs 9 lakh.
Before investing in Immediate Annuity plans, make sure you have taken a close look at all the 7-8 pension options. In a few options, the amount invested i.e purchase price is returned back while in others the amount is not returned to the nominees.
The pension options, ‘Immediate annuity with return of purchase price’ or the ‘Immediate annuity with return of amount on death’ are the ones where pension is paid till lifetime and then the principal is returned to nominee.
How to choose pension option
Choosing the pension option has to be done carefully keeping your spouse, children into consideration, apart from interest rate and inflation. “Before you opt for investment in annuity plans, you must evaluate which option works for you. Take the help of a financial planner to understand the impact of inflation on your expenses and whether the income from an annuity plan which may be looking good now will be sufficient in the long run or not,” says Manekia.
Watch these factors
A big fallout of Immediate Annuity plan is that you won’t be able to get the principal back during your lifetime. If rates start to increase, you continue to get contracted rates and will fail to take advantage of increasing rates. Although such plans allow anyone above 45 to invest in them, mostly retirees choose to invest in them. Lastly, only a small portion of your retirement corpus can be deployed in them to meet your post-retirement needs.