As INTEREST rates fall, retirees planning to buy an immediate annuity should lock in at current rates to get higher guaranteed payouts for life. The annuity rates of life insurers are directly linked to the 10-year government bond, which has fallen to 6.28% now from 6.78% on January 1 this year.
Life insurers are revising the rates on their annuities as they find it difficult to meet the earlier returns. So, if one invests Rs 20 lakh in an immediate annuity with return of purchase price, even a decline of 50 basis points in the rate of the annuity would reduce the yearly income by Rs 10,000. On a 25-year-long retirement, this will be around Rs 2.5 lakh.
Lock in at current rates Chetan Vasudeva, senior vice president, Business Development, Elephant.in, Alliance Insurance Brokers, says as immediate annuities are irrevocable, anchoring in a higher rate will shield one against future dips in interest rates. “This is especially significant in India because guaranteed income products appeal more to retirees than market-linked products,” he says.
As most life insurers do not offer inflation-indexed annuities, locking in today’s fixed annuity rates will guarantee not only financial security but also reassurance for the future. The returns are based on the prevailing interest rates.
Bhavna Verma, appointed actuary, IndiaFirst Life Insurance Company, says when interest rates decline, an annuity provider’s potential earning drops, forcing it to offer lower annuity rates. “Timely purchase will ensure one receives a higher income insulated from future interest rate movements up to an entire lifetime,” she says.
Annuity rates
Life insurers fix immediate annuity rates depending on the age of the annuitant, amount of money to be annuitised and the type of annuity opted and the 10-year bond yield rate. For instance, currently for a 60-year old, with a purchase price of Rs 50 lakh, Life Insurance Corporation of India is offering 6.71% for annuity with life with return of purchase price, 6.68% for joint life annuity with return of purchase price. For without return of purchase price, it is 9% for annuity for life and 7.74% for joint life annuity. Similarly, SBI Life is offering 6.8% for annuity with life with return of purchase price, 6.77% for joint life annuity with return of purchase price, 7.96% for annuity for life without return of purchase price and 7.19% for joint life without return of purchase price.
Assess the requirement
The amount of liquidity that one needs to maintain along with the needs of the family are key factors to look into while deciding on an annuity plan. Fixed immediate annuities offer predictable, pay-outs, which is ideal for budgeting and peace of mind, while variable and indexed annuities offer the potential for higher returns but come with more risk and complexity.
Casparus Kromhout, MD & CEO, Shriram Life Insurance, says if the priority is to maximise monthly income, then a single life annuity will make sense. “But if you are looking for peace of mind for your spouse and want the investment returned to your family, then joint or return of purchase price options may be better suited,” he says.
Payout frequency, single/joint-life cover option, rate of purchase plan, inflation protection coverage etc must be considered before buying an immediate annuity product. Rakesh Goyal, director, Probus, says an individual must factor in household expenses, medical needs and other additional income sources before opting for an immediate annuity plan.
Tax on annuity income
One should keep in mind that annuities are generally tax-deferred, but the interest component of each payment is subject to taxation as ordinary income when withdrawn. “We suggest not putting all the retirement funds into annuities, as these policies are for steady income and may not provide the liquidity in an emergency,” says Vasudeva.