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..
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