The most common annuity plan you will hear about is Immediate Annuity for Life with Return of Purchase Price. But what really does all that mean? Before you dive into making your choice, read what are the options and what suits you best. Because once you start an Annuity plan, it may be expensive or sometimes impossible to get out of it for the rest of your life!
The Immediate Annuity Plans market in India is just taking flight. LIC has always been the first, but of late many private life insurance companies are offering competitive rates and innovative options that has made the Annuity product category look up for growth.
Annuities can be categorized in various ways :
- Starting Time of the Annuity
- Type of Pension Amounts offered
- Type of Pension Scheme
- Liquidity Options
Annuities based on Starting Time
- Deferred Annuity – Your investment is made into a fund (of your choice) which keeps growing for a chosen period of time. You can choose the time when to start the pension from. e.g. Invest Rs. 1 crore into a debt fund for the next five years. It may give you a fund of above Rs. 1.40 crores after 5 years. This fund is later used to provide you pension. The pension amount will be higher because the fund size is now bigger, as well as because your age is now more than 5 years ago.
- Immediate Annuity – Your investment immediately starts giving you a pension without waiting for any period.
Pension can be generally availed of on a monthly, quarterly, half-yearly or annual basis.
Annuities based on Type of Pension Amounts offered
- Guaranteed (or Fixed) Annuities – This means that the amount of pension that you will receive is fixed for the entire chosen period of the annuity plan, or till death. There is no change in this amount. You need to keep in mind that inflation will keep reducing the real value of a guaranteed annuity over time. At the same time however, this kind of annuity insulates you against reducing interest rates over time.
- Variable Annuities – In this type of annuity option, you can choose to keep your investment in a variety of asset classes ranging from most conservative (such as money market, guaranteed fixed accounts, and government bond funds) to more aggressive (such as growth, small cap, mid cap, large cap, capital appreciation, aggressive growth, and emerging markets investments). Balanced funds with combination of these asset classes are also available. There is generally a Minimum Guaranteed Annuity in such an option. This kind of annuity plan works like a high-risk, high return plan although it does allow you to switch from one asset class to the other without any cost. Make sure you know how to manage your fund either yourself or with help from a financial advisor, before you choose a variable annuity plan.
- Indexed Annuities – Similar to variable annuities but the rate will depend on an index (such as S&P 500, Sensex, etc.) – yet to be available in India.
Annuities based on Type of Pension Scheme
- Life Annuity – Guaranteed pension to the annuitant till the end of his/her life.
- Life Annuity with Return of Corpus (or Purchase Price) – Guaranteed pension to the annuitant till the end of his/her life, finally the Corpus (initial investment made) is returned to a nominee.
- Annuity Guaranteed for 5, 10, 15 or 20 years – Guaranteed pension to the annuitant for a fixed period of 5, 10, 15, 20 years. It stops after that. In case the annuitant dies during the period, the equivalent of pension is paid to the nominee for the remaining period.
- Annuity Guaranteed for 5, 10, 15 or 20 years, and for life thereafter – Same as above option the difference being that if the annuitant survives the term, he/she continues to get the same pension till the end of his/her life.
- Life Annuity with Joint Life, Last Survivor – Annuity is paid to two individuals at the same time till their death.
- Life Annuity with Contingent Survivor – Annuity is paid to the principal annuitant till his/her death. If the spouse is alive at that time, the annuity is paid to the spouse till her/his death.
- Combinations – Some companies also offer combinations of the above options.
Annuities based on Liquidity Options
One big drawback of Annuity Plans is that they are rigid and liquidity is poor. To address this, some companies also offer annuities which have liquidity.
Remember that based on your chosen annuity type, companies invest your money into certain combination of bonds, securities, debentures, etc. Liquidity for your pension plan comes at a cost. When you choose to withdraw from the annuity plan, your investment needs to be withdrawn as well, and that may involve exit costs which you will need to pay.
- Annuities with no liquidity – You cannot get out of the annuity plan once you begin it.
- Annuities with Surrender Penalties – If you stop or withdraw from the Annuity plan a certain surrender charge needs to be paid. This depends on the type of annuity you have chosen. Sometimes this is waived off if the surrender is after a certain no. of years.
- Annuities without Surrender Penalties – No surrender charge at all if you withdraw from the plan.
Make sure you clearly check what kind of Annuity Plan you are signing up for.
Also, not all the above types I mentioned are available in India. But this surely is a market which will see all variants in the time to come.
You are now ready to compare the annuity plans in India and decide which one to go in for.
