Should you buy an annuity?
Should you buy an annuity – is not an easy question to answer. The more the number of people that you ask, the more will be the answers. It depends on a lot of factors. An inexperienced financial adviser is likely to tell you that the annuity is a very poor investment and should be avoided. It is very inefficient financially speaking, so it is not a good investment. In India it is very expensive.
All partially true. Each person has to take a call on his life and live with that decision for the rest of his life.
If you are 80 years of age, a responsible person to take care of your Rs. 4 crore liquid portfolio, you do not need an annuity.
However if you are 65 years of age and have a Rs. 2 crore portfolio, it is worth buying an immediate annuity NOW. Or a deferred annuity to start paying once you are 72 years of age. Of course you will need to buy another annuity at the age of 72 also – and that is likely to be more financially efficient.
For financial planners (who are not life insurance agents) the annuity is a very poor investment to suggest. Immediate annuities yield very poor commissions and therefore not very liked by the agents too. They are more likely to suggest a MIP from a mutual fund or something similar. They may suggest a pension plan, but not an immediate annuity. Here the commissions are better, in fact far better.
Today many of the bonds issued by the psu companies are available at TAX FREE YIELDS of 7.5% current yields. So the argument is that you could take that instead of buying an annuity. This is good argument if you are over 65 years of age. Many of these bonds are for 20 years, and thus should last till you are 85 years of age.
However what if you outlive those bonds? what happens after that.
So assuming that you have say Rs. 50L in such bonds maturing from your age of 80 to 85, please use the following strategy.
At age of 65 buy an annuity plan for Rs. 15Lakhs – you do not have any choice, it has to be LIC. Depending on your corpus I would suggest buying one without return of premium.
At age of 72 buy an annuity plan for Rs. 25 Lakhs – without ROP from LIC.
At age 80 to 85..put the maturing amounts into bank fixed deposits – remember you are now not worried about inflation at all..
Raj
buying annuity is mandatory for NPS and it will be a mandate reason for NPS investors to go for it, I hope that this phenomenon will make the annuity products a little attractive.
subra
Exactly why it will become LESS ATTRACTIVE..not MORE..captive customer. You will not have NPS annuity portability…unless Na Mo does some magic.
Anil
Sir,
Why not invest in Senior citizens Saving Scheme (https://www.sbi.co.in/portal/web/govt-banking/senior-citizens)?
I am assuming that, we can have the account for 8 years and then we can close and reopen it again. The only problem is with the limit, that is, 15 Lakhs.
I read yours and freefincal blogs regularly.
Wouldn’t the mix of these suffice:
– SCSS
– Post Office Monthly Income Scheme.
– FDs
– Ultra short Term Debt Funds
– Tax free bonds.
Thanks.
C J Gopinath
Sir assuming you have seen LIC AD of jeevan akshay.
It promoting the product for younger people in 35 age group.
I have seen lic agents selling jeevan akshay to young people and reinvesting the annuity in conventional plan .
subra
Anil – what happens if you live far beyond your imagination, and if interest rates fall when you try to renew? if your 9% Fd gets renewed at 5% how will you react?
so it is worth locking in a small amount (at least) for an infinitely long time without RENEWAL RATE RISK.
A combination of these along with an annuity will work…not just these alone (if you live long) and not annuity alone (if the amount is not in crores!).
htcjsb
Today hardly anyone needs annuity from NPS as NPS has just begun. By year 2035 and 2040, there will be lakhs of people retiring using NPS as tool and will be forced to take annuity. So here is market dynamics:
1) Today when demand for annuity is less and global economy and factors are into play, annuity rates are like 7% per annum (lets say)
2) In 2040 when lakhs of people will roam in market asking for annuity, the high demand for annuity will bring the interest rates down by the cartel of annuity providers.
Remember the capitalists will drive the annuity interest rates and there will be a limited cartel then too.
So annuity percentage then will be low than what the retirees would require.
Very complex to relate, corelate and imagine.
Yet, I can confirm there will be no annuity provider in market inn 2040 that will make life of retirees easy.