In the absence of a social security scheme, a pension scheme or annuity is a retired person's only hope. But one has to choose the right option. While investment avenues like Public Provident Fund, Employees Provident Fund and National Pension System (NPS) can be used to build a corpus, to ensure a regular income, annuity schemes offered by insurance companies can be useful.
Also, under the provisions of the NPS, 40 per cent of the accumulated corpus has to be used for purchasing an annuity from one of the empanelled annuity service providers. Hence, while choosing payouts the policyholder has to be careful about choosing the right option. There are several options of getting back the accumulated corpus. Some provide you with payouts till the end of life, others give part of the money to the nominee, some increase the payouts as one grows older and yet other schemes provide the annuity for a fixed period.
Most companies offer annuity plans with various options. Some offer a combination of the payout options. If you choose the option of return of purchase prices, the payout amount is low. Whereas in a fixed tenure the annuity amount is low since there are guaranteed payouts even after the term, says Anuj Bhagia, chief marketing officer of policybazaar.com.
Let us assume the policyholder has invested Rs 1 crore in an annuity plan. The purchase price would be Rs 1,03,09,000, including taxes. In case of annuity guaranteed for life, the annual payout would work out to Rs 8,85,500, which is the highest. But if he were to die within one year of buying the annuity his nominees will not get any money.
If the policyholder were to opt for the annuity guaranteed and return of capital on death, the annual payout would work out lesser, at Rs 7,29,000. If he opts for annuity guaranteed for five years and for life thereafter, the yearly payout would be Rs 8,77,600, which is lower than annuity guaranteed for life, but more than the option with return of capital on death. If he opts for guaranteed for more number of years, such as 10, 15 or 20, the annual payout would be correspondingly lower.
According to Bhagia, annuity guaranteed for life works for customers who do not have any financial obligation after death because the payout is highest as there are no charges built in to provide an extra amount after death. The policyholder is able to utilise the money while he is alive. According to Prakash Praharaj, founder and chief financial planner, Max Secure Financial Planners, before buying an annuity policyholders must consider the rate of return offered by the company, inflation rate, service levels of the company and to some extent the reputation of the company.
The rate of return is usually similar to that offered by debt products. Service levels of the company are important to ensure that policyholders get the payouts in a hassle-free manner. And since these payouts happen over a fairly long period of time, the reputation of the company or the solvency ratio, too, is also something customers should look at, Praharaj adds.