There are many, many reasons to avoid buying an annuity, here are some prominent ones:
Let us start at the beginning. What is an annuity?
It is exactly a reverse of a loan. Or let us say it is a loan that you give to a fund house – and they repay it over a period of time. Let us say you give Rs. 1 crore to LIC and ask them to give you an annuity…then they are likely to give you, say, Rs. 6 L per annum for the rest of your life. Well it depends on your age. If you are say 68 you may get it for the rest of your life, but if you are 48 they may price it even more fine and reduce the amount.
Sounds so good on paper, why should you NOT BUY IT?
1. Simply because it comes with excessively high COST and huge discounting because of RISK.
After all all products have to be standalone profitable for the insurance / pension company so it is not priced well at all. The YTM on the 10 year G Sec is at 9.07% (22 Nov, 2013) – and you can surely buy a 10 year paper….so why should you suffer a 2% discount on your annuity?
2. Extremely inflexible product: Let us say you are now 58 years of age and will work for another 4 years…I would like an annuity product which will allow me to buy annuities at various ages. Let us say I have Rs. 4 crores in my annuity fund. I should be allowed to buy annuity worth Rs. 1 crore when I am 62, and another annuity when I am 69, and 2 more annuities when I am 75 and when I am 80. This gives me good pricing flexibility. Sadly, this is not possible. (the stupid govt NPS is worse)
3. It is not tax efficient at all in India (the 80C deductions are easy to get with elss, pf, nsc, ppf, school fees…and the amount is Rs. 100,000)
4. It takes a lot of money to get a reasonable corpus…so if you are investing Rs. 10,00,000 every year over a 20 year period you might end up with a sensible corpus…and we all know this is tough.
5. It is tax inefficient – when you withdraw from this fund is FULLY TAXABLE.
6. No more guarantees – read the clauses carefully. Or should i say no free lunches?
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