How do I start telling you that hating annuities, ok, hating annuities passionately is where I am starting from. Now, let me tell you why I hate annuities. Ok, here we go:

  • there is ONLY one annuity provider in India
  • obviously you understand the power of pricing if you are the only player, right?
  • it is a high hidden commissioned product and the client has zero transparency
  • clients buy it because the seller says ‘what if you live another 87 years
  • clients buy it because it has the word ‘pension’ tagged to it
  • 99% of buyers do not understand what they are buying
  • I maybe wrong about the 1% who think they understand
  • you cannot by pass the distributor..Sales loads are atrocious
  • the distributor will give you no service – he has been paid a nice fat upfront commission
  • the government will give you no service but charge a criminally high service tax – peculiar to India
  • LiC will not object to the govt doing anything to hurt the annuity holder
  • In case you are stuck, you are stuck. No exit is possible
  • First off, the payouts aren’t all that great these days. A lifetime guaranteed  payout for a 62-year-old man offers an annual cash flow of between 4%-6% at current rates. Improves with age!

By and large annuities are lousy products for investors. I guess that was obvious I have started the article. However in situations where the person is say 73 years with a family of longevity risk, this is a good product. For my 88 year old father I am doing the fund management, and he has no clue what percentage is where – as long as I can meet his cash needs. However if there is nobody who is going to look after your investments, annuity is not a bad product at all. It takes care of the following:

  • simple product to understand
  • you will surely get a fixed amount every month
  • you actually do not care what happens to the corpus after you die
  • no reinvestment risk, no fluctuation risk, no credit risk
  • can be structured in such a way that it protects you against inflation
  • I like it for specific persons only
  • you do not need if you have a huge corpus and inflation is not a concern
  • you should put only a small part of your corpus say 20% subject to a maximum of Rs. 2 crores
  • it should pay for the basic necessities and can be adjusted for inflation
  • take at own age 72, 77 and 82 staggering helps – assuming spouse is younger by say 5 years
  • do not use it at the accumulation stage, only at the annuitization stage

Assuming that you have a corpus of Rs. 10 crores (in 2016) and you are say 65 years of age, you can surely buy a lot of PSU bonds paying about 8% tax free and buy 15 year bonds. This means you do not have to worry till age 80 about getting a Rs. 5 lakh annual income – about 40k a month. This should be sufficient..for a couple who has a house. It will also take care of inflation..because of the size of the amount. By the time you are 70, you may find this annuity is not sufficient. So go and buy an annuity by paying Rs. 1 crore for an immediate pension. Repeat action at your age of 75 and also at 80 – this time you need not worry about inflation.

If you still have excess savings that you’d like to shield from high current taxes (continue your ELSS!), a variable annuity is not the worst option (I admit it is bad, not terrible), and it has the added benefit of having a layer of protection from lawsuits or creditors. And in most cases pay for life and protect you for life.

But for most investors still in their 30s to 60s, it makes sense to simply invest their excess savings in tax-efficient mutual funds, ETFs or a basket of quality buy-and-hold stocks. Save yourself the fees and unnecessary complexity that comes with an investment in annuities. Sigh.

 

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  1. The most nonsense part of the entire ‘pension’ system in India is that :
    1. It gives only a minuscule 6 to 7% ‘return’ on your corpus. In case one opts for non-return of corpus, then, it goes up to around 8%. In both the cases, the return is wretchedly low and does not enthuse a person to take it.
    2. All pensions are taxable.
    3. Even 60% withdrawal of NPS corpus is also taxable – irrespective of whether you withdraw lump sum or buy an annuity. The only difference is that you pay 30% on lump sum withdrawal of balance 60% or you pay income tax on your annuity depending upon your tax bracket.
    4. I am told that a distributor or agent of LIC ‘earns’ more by way of commission from LIC (imagine 35% in first year, 20% in second year, 15% in third year and 5% thereafter throughout the life of the policy) vs a poor policy holder (who earns any where between 6 to 7% CAGR).
    5. This whole system of pension and that too tax-ability of pension has to stop if India wants to progress and wants its population to save through organized schemes run by a well run AMC or a Government agency.

  2. My uncle purchased annuity product . he still receiving annuity at the same rate when purchased now interest come down . he is happy.

  3. Let me start by mentioning that “Annuities is the ONLY financial instrument which offers the GUARANTEE of a LIFE-TIME”. And hence, it caters to the segment that’s averse to volatile markets and expects capital/income guarantee. The article mentioned above contains quite a few factually incorrect points which I would like to clarify:

    1. Annuities are not offered by only one player. There are a total of 14 Life Insurers who offer annuities in India.
    2. The most efficient pricing, thus, can be evaluated by customers (based on available options from among 14 insurers as mentioned in pointer 1), which eventually helps them take an informed decision that is best in their interest
    3. The commissions for annuities are extremely low (these are also governed by regulation), and in certain cases where theres no intermediary and no commission is paid, the benefit is passed on to the customer. I am not too sure of the product loadings mentioned by the author.
    4. With improvement in health care resulting in corresponding increase in life expectancy, its quite a possibility that people buying annuities now at 55-60 would outlive the current assumptions life expectancy. In all such cases the risk of reinvestment rests only with the insurer, given that rates are guaranteed. Despite adverse annuity experiences in western world and far east, where annuities resulted in huge losses for the insurers, in India players are still offering attractive rates
    5. Annuities are a form of “regular and guaranteed income source”. The customer may call it by any name, but it doesn’t impact the USP or the guarantee feature of the product. With the rise in no of customers going for annuities even in the retail market, there definitely is an evidence that the customers find value in the product
    6. Not too sure of the sources of the 99% and 1% data point regarding the customer not understanding the product! It’s the simplest of products – as simple as an FD or RD. The advantage is that every annuity product comes with a whole lot of options ranging from 5 to 11 depending on which insurer is offering it. Also, while the article later on mentions that it’s a simple to understand the product, I could not quite appreciate the reason for this contradictory mention.
    7. If the customer wishes to take his/her own decision and not depend on a financial planning advise, then the option of buying it directly from the organization exists with most players. Eventually it’s the customer’s decision and an insurer’s job is to provide options and mode of purchase. Having said that and given low awareness about this product category, distribution does help reach out to the customers who are either unaware or require assistance in shopping around
    8. The budget in Feb 2016 has made special provisions for a reduced service tax in annuities w.e.f. 1st Apr16, and in certain cases waived it off completely. Service Tax is a statutory requirement which we as customers pay for smallest of purchases or for dining out or for buying white good etc. It practically exists for everything around. Singling out this feature only for annuities is like sharing partial information.
    9. Like every life insurance product annuities also come with a free-look clause, which effectively means that the customer has an option of returning this product to the insurer within 15-30 days (depending on mode of purchase), after receiving the policy document, and get the money invested back. I would here like to draw reader’s attention to the fact that for free look period, days are calculated from the day the policy document is received by the customers and not from the day the policy is issued. Hence, whatever time it takes to dispatch and deliver are not counted for calculating the free look period
    10. The 4-6% of annual returns is not a standard benchmark across all annuity poviders! While there are few players who offer low annuity rates, there are also many who offer competitive rates. For e.g. a few players with high annuity rates give an annuity in the region of 7.3%-7.5% for a 60 year old if the customer buys return of purchase price option. At higher age annuity rates are higher. Another notable feature is availability of premium discounts/incentives for higher purchases. This depends on product feature and the prevailing yields. Once bought the rate is guaranteed for life.
    11. Annuity ideally should be purchased by customers who are 55 plus. Hence, its important that they do let a good corpus accumulate till they are nearing retirement. This can be achieved by investing in available instruments subject the financial planning needs and risk appetite of the customer. Applying a standard formula for all may not serve customer specific objective.
    12. Tax free bonds are a good option but their availability in an open/retail market for a normal customer has its own challenges and it might not be available at all points in time. Waiting in anticipation may well result in an opportunity loss!
    13. In Indian market, majority of the customers opt for the return of capital option in annuities (unless its being purchased as a defined beneit scheme by an employer), which means that while the accumulated corpus gives a guaranteed income during customer’s life time, post death the premium is paid back to nominee(s)/legal heirs of the customers

    While I have in principle disagreement with author on most of the points, I also appreciate and agree with a few of the tips mentioned in the blog:

    1. The customers need to ensure that they diversify their portfolio with a proper mix of guarantees and market linked opportunities. This would help them have a play depending on their retirement needs and risk appetite
    2. Annuity is an extremely need specific product (so is any other instrument which an investor opts for). For most of the customers the objective is three fold – protect their retirement income, negate any downside in investment and legacy planning for loved ones
    3. For extremely high aged investors (85 plus), it’s a prudent decision to manage funds in a customized way. Most of the players do not offer annuities for customers beyond 85 years of age
    4. One should go for joint life options, which secures income needs for both self and spouse. Given a not so strong social security in the country customers should plan accordingly.

    As a retirement income source, I strongly feel that Annuities is a must have, funding a some/substantial part (subject to the individual’s obective) of one’s retirement income. While there can be arguments in favour or against, its extremely important that a customer evaluates it vis-à-vis his/her requirement, rather than comparing it with only “the good side” of market linked instruments! Each instrument serves a specific purpose and one should always fit the product with the purpose, rather than the other way round! As a first step all customers should ensure they evaluate the benefits/returns and understand the features completely before making a decision. And yes the timing to entry also playes an important role.

  4. 1. The point under consideration is “low returns” from an annuity/pension which is undoubtedly in the range of 6 to 7% with “return of capital” and around 8 to 9% with “no return of capital”.
    2. Second point under discussion is that the annuity/pension is “taxable” in India which makes after-tax return even further drastically less.
    3. The point referred to LIC commission to its agents/distributors was for so called “endowment policy with profit sharing/bonus/loyalty bonus” and not for ‘annuity/pension’ plans.
    4. I am yet to come across an annuity/pension plan from LIC or any other AMC which give an option for “direct route” and/or “through agents/distributor”. Where to choose it from in the Form/online Form. Please give details.

  5. 1. Annuity rates are a function of prevailing yields. With the interest rates constantly coming down (comparison over last 20 years would give a good indication) it’s a good option to block today’s rate for a life time. For e.g. people who bought annuities 20 years back continue to get the same rate even today, despite the interest rates having come down drastically. Its eventually a customer’s choice whether to protect the capital and ensure a guaranteed inflow of income or invest in equities hoping for a upside and be prepared for any downside as well! My personal view on the matter is that for an average Indian, a certain part of the retirement savings needs to give a guaranteed income. For rest of the corpus the customer can, depending on his financial planning and risk appetite look at other options. Basically he/she should have best of both the worlds, without taking considerable risk in retirement phase.

    2. Annuity income is taxable at the hands of the annuitant/pensioner, but only based on applicable tax slab. While it’s good to look at this point, we should not miss the sight of the fact that “how many Indians actually come under the tax bracket owing to their annuity income?”. For e.g. the annuity income to come in tax bracket, one needs to invest approx. 60 lacs plus to buy an annuity (with ROP option)! How many actually have this kind of retirement kitty? And those who have, shouldn’t they pay their tax dues?

    3. The distribution remuneration is a matter of product type, structure, pricing and mode of purchase. It’s not a generic figure and there are regulations governing it across platforms. If we look at ULIP plans the commissions are on the lower side. Again it comes to the choice made by the customer depending on his/her preference.

    4. If you visit the portal of Life Insurers many have an option of “buy online”. You can alternatively also approach call centres and ask them for an adviser. That should help I believe.

    My point again is simple – every instrument serves a purpose. What needs to be done is matching the product to the purpose and not the other way round! As customers before we make a purchase decision we should read product features, T&Cs, fill the forms ourselves and ask a lot of questions.

    Have a look at this article pertaining to annuities that came yesterday

    http://www.thehindubusinessline.com/portfolio/relax-with-annuities/article8377743.ece

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