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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