At the end of your working life, you generally expect your savings to see you through your silver years. Among a plethora of options available, immediate annuities offered by insurance companies are avenues to generate a steady defined income all through your retirement years. For those accumulating a corpus via the NPS (National Pension System) it is compulsory that they annuitise 40 per cent of the sum accumulated in their account.
But are the yields on immediate annuities good enough to beat inflation? We discuss returns and taxes related to these pension plans. In addition, we discuss safe alternatives that currently give better returns and an assured income stream on your savings.
Structure of immediate annuities
As the name suggests, immediate annuities are products offered by insurance companies that give you regular income till the end of your life from the one-time large premium that you would pay upfront. The premium is called the purchase price.
There are many variants or options within immediate annuities on how to receive this immediate annuity. These include fixed annuity for life, annuity for life with return of purchase price (to the nominee), joint annuity (for you and your nominee) for life with and without return of purchase price, increasing annuity and so on. Annuity here refers to the pension you would receive periodically. The age of entry for getting a pension from these plans starts from 40 and goes all the way up to 80 years.
What pension plans give
For the purpose of assessing the returns from annuity plans, we have made a few assumptions. From the above options, we have considered only the payment of annuity for life with return of purchase price to the nominee upon death. . Pension is assumed to be paid annually.
The age of the person signing up for this immediate annuity plan is assumed to be 60. The purchase price is assumed to be ₹1 crore. For immediate annuities, there is a GST (Goods and Services Tax) charged at the rate of 1.8 per cent. Therefore, the purchase price increases to ₹1,01,80,000. We assume that the annuitant (person receiving the pension) would live till the age of 80. So, annual payouts for 20 years are considered.
We studied the immediate annuity plans from seven insurers – HDFC Life, LIC, SBI Life, Kotak Life, ICICI Prudential, Bajaj Allianz and Tata AIA.
Assessing the annual payout option of these insurers, we get ₹5.81 lakh to ₹7.12 per annum from a premium or purchase price of ₹1 crore. These payouts are fixed and will not change over your pension period even if interest rates rise.
These payouts translate to yields of 5.66 per cent to 6.95 per cent, calculated by taking the XIRR for annual cashflows and return of purchase price after a period of 20 years.
The pension plans of LIC, HDFC Life, Kotak Life and Tata AIA offer rates of 6.02-6.95 per cent. Immediate annuities of ICICI Prudential, SBI Life and Bajaj Allianz offer yields of less than 6 per cent!
What all this means
Even in these inflationary times, none of the annuity plans offer even 7 per cent yield. Also, do remember that any income from annuity plans is fully taxable at your applicable slab.
Most investors can skip these annuity plans. Those who have to compulsorily annuitise a portion of their savings – from NPS, for example – could look at the immediate annuity plan of HDFC Life, given that it tops the yield chart compared to other peers.
Safe alternatives
There are many other fixed income alternatives that currently offer higher returns than immediate annuities. Given that interest rates may harden over the next few months, interest rates may perhaps increase for these instruments as well.
- Senior citizen savings scheme (SCSS) from the Post Office: It currently offers 7.4 per cent interest and pays quarterly interest. The maximum investment allowed is ₹15 lakh.
- Pradhan Mantri Vaya Vandana Yojana (PMVVY), run by LIC: The interest rate for the monthly pension option is 7.4 per cent while it is 7.66 per cent for annual payouts. Maximum investment allowed is ₹15 lakh
- RBI floating rate savings bond: Currently offers 7.15 per cent interest (NSC rate of 6.8 per cent plus 0.35 per cent). Payouts are half-yearly. There is no limit to the amounts you can invest
- AAA-rated fixed deposits of Bajaj Finance:(for those who can take higher risk): These offer 7.75 per cent for the annual interest payout option for senior citizens. There is no upper limit for investing these deposits.
All the above interest payouts are fully taxable. So, post-tax returns would be lower, as is the case with immediate annuities as well.
You can look at investing in a combination of these instruments too.
Besides, if you have a high risk appetite, you can invest a portion of your retirement corpus in equities through the mutual fund route to beat inflation. Be careful not to tap into this amount for at least a 5-10 years after your retirement. This can help your kitty to last your full lifetime without getting exhausted.