Look beyond the sunset years

ET 25/2/09


While selling pension plans, agents rarely provide a benefit illustration beyond the retirement


date. For insurance companies, pension schemes accumulate a savings corpus for retirement. However, insurance regulation requires that this corpus be mandatorily utilised for purchasing annuity – a contract under which the policyholder receives regular payments.


Herein lies the rub. No company can tell you what returns you will receive when you purchase your annuity 30 years hereafter. Worse your insurance company may not even have an annuity product at present.


Taking the decision to purchase an annuity is difficult because of the lack of clarity on post-retirement benefits. Since a large part of premium comes from the sale of pension plans, it is high time to review the options offered by the annuity providers in India. Here are a few:


Annuity payable for life

The annuitant is paid a fixed sum at pre-decided intervals throughout his life. The pension ceases as the annuitant dies. The quantum of pension payable here is the highest. It can also be known as ‘life annuity’ and is suitable for someone who does not have any family obligation to provide income after his death.


Life annuity with fixed period guarantees

Also known as guaranteed pension, this type of annuity ensures that the pension is payable for a certain period and thereafter as long as the annuitant is alive. Shorter the guarantee period, higher is the pension. The pension payable under the five-year guaranteed option is higher than the pension payable under 20 years.


Some insurers may start with a lower tenure, such as three years, for guaranteed pension but may not stretch up to 20 years. This can be a good option if a ‘family’ is in need of ‘income’ for a certain period till some one else is expected to take up the role of a breadwinner.


Joint life & last survivor annuity

This option ensures that the annuity is paid till either of the annuitant or his/her spouse is alive. Some insurers have capped the amount at 50% payable to the survivor, when the annuitant dies. This type of pension is ideal when the annuitant intends to provide for a regular income to the spouse. Joint life pension is determined after taking into account the age of both the annuitant and the spouse.


Annuity with return of purchase price

This is an extension of annuity payable for life. The annuitant enjoys the pension till he dies. The pension ceases as the annuitant dies and the purchase price is paid to the nominee of the deceased annuitant. However, the pension payable under this option is less than the pension payable under the first option.


“That’s the most popular option, as the initial purchase price is retuned to the nominee after the annuitant’s life time. This comes in handy, especially, if an annuitant has lived for a short period like four years. He may not enjoy his retirement corpus. At least, the nominee/spouse gets back the invested money, says a certified financial planner.


Life annuity increasing at a fixed rate

This option is also an extension of the life annuity. The annuitant is paid a sum which is revised upwards by a certain percentage throughout his life. For example, the annuity is increased at a simple rate of 5% each year. This is good for those who retire early and expect to live a long retired life and prefer an adjustment for inflation.


Determinant of rates

How much monthly income an annuitant receives for every Rs 1 lakh paid depends on three variables. The first is the returns generated by an insurers on funds which, in turn, is influenced by prevailing yields on government bonds.


Secondly, life expectancy also plays a role in pricing of the annuity. Generally, the rate of return on life annuities is seen hovering around the rate of interest on the one-year bank fixed deposit. But the factor to remember is that you can lock the rate of interest on bank fixed deposit for at most 3-5 years; while the pension amount is fixed for the lifetime of an annuitant or as per the option selected above.


Retirement decision

Similar options are on offer when employers offer pension benefits to their employees. Those who intend to opt for retirement before the stipulated superannuation date should have a look at the pension benefits they are entitled to.


The contribution from the employer is accumulated by the insurer and the quantum of pension is ascertained taking into account the option you chose. It makes a lot of sense to pay heed to the pension you may get before you decide to retire. Many employee-friendly organisations inform employees of their pension entitlement upon request. This helps for a more informed decision.


Is it worth the buck?

Some financial advisors argue that a pension policy does not offer the best return or a good tax break compared to other investment avenues. There are better ways to structure your retirement corpus like PPF, equities, mutual funds etc. Most people get lured by the word pension in pension plans. But the amount you earn is taxable.


“You can build a retirement corpus by selecting a basket of various product options from different asset classes. Once you build the required corpus, you can hand over the money to an insurance company. It can manage your corpus and provide a monthly income through an immediate annuity.


For those who are less disciplined when it comes to investment habits and do not understand the complex by-lanes of the investment game, pension plans could be a solution for their retirement needs.

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