Annuities

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What is an annuity?
An annuity is a fixed stream of income for a certain defined period of time. Similar to pension, annuities provide regular income stream during retirement years. Annuitization is the process where by you pay a lumpsum accumulated from years of savings in a plan (such as NPS, deferred pension plans etc) to buy an annuity product which would pay out regular cash flows primarily during your retirement years. One who receives such a payout is called the annuitant. There are several variants of annuity plans available depending on your preference for payout tenure, increments desired, continuing payouts for spouse in case of death of annuitant etc.

Types of annuity
  1. Immediate annuity - pay with lumpsum & start receiving annuity immediately (eg. LIC Jeevan Nidhi)
  2. Deferred annuity - a savings plan where you save some amount every year for 5,10,20 years & then start receiving annuity from the deferred date (eg. UTI pension);
  3. Annuity certain - receive a fixed annuity for a fixed tenure
  4. Guaranteed period annuity - Annuity is guaranteed for the stated number of years even if annuitant dies
  5. Life annuity with Joint life / last survivor - Annuity continues to be paid out to the joint life / last survivor even upon death of annuitant
  6. Annuity with return of purchase price - Annuity paid for life of annuitant with an option to return purchase price to nominee
In India, annuities are offered by Mutual funds as well as insurers (LIC, SBI, UTI, ICICI etc), however these are in a nascent stage and there are pros/cons depending on whom you buy it from (EET or EEE). The main advantage is that you do not have to manage the lumpsum & monthly income stream. However the downside is that annuities are taxable as income in the year of receipt and are low yield products when compared to alternatives such as long term tax-free bonds offering 8.3% p.a (eql to 12% pre-tax return).

Is it the right retirement product for me?
The deferred annuity scheme and pension plans are sold with nice illustrative figures as future incomes that the annuitant is expected to receive in his retirement years. However for a common investor it is not easy to calculate the yield from these products as compared to say the returns from a FD. Some people may not also be comfortable with the "no return of purchase price" option as they may wish to bequeath the asset to a heir that takes care of them. Investors are also concerned whether fixed payments would help them ride over the inflation wave over a 10-20 year time frame. Talk to your financial planner to see if your retirement portfolio needs to be supplemented by an annuity plan and whether you could customize available products to suit your future needs. With the help of your planner you could structure your monthly income streams in an inflated-adjusted and tax efficient manner.

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