Longer lifespans, higher cost of living, aspirational lifestyles, nuclear families as well as migration of the next generation for careers necessitate rigorous planning of retirement finances.
Enter the annuity, or pension policy, an important insurance tool to mitigate the risk of living too long. Think of it as a substitute for your salary after retiring, as it serves well as one component of your income bolstered by an owned residence, investment income and so on.
Annuity policies are offered in India by life insurance companies, and there are quite a few options from which you can pick your preferred mix.
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The premium you pay (purchase price), gets you a pension (annuity) from a date of your choice, called the vesting date. You can pick your retirement date or any other date to be your vesting date, and the premium paying period would normally be until that date.
Just as you can choose the frequency of your premium payment — monthly, quarterly, semi-annual or annual — you can choose the frequency of your annuity payout also. This is called ‘Deferred Annuity’ and works well for those putting by a periodic premium amount through their working years to get an annuity on retirement.
You can also make a one-time lump sum premium payment for an ‘Immediate Annuity’. Here, your annuity payment starts, well, immediately.
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This is suitable if you are just about to retire and will get a lump sum retirement benefit like a gratuity, your Employee Provident Fund commutation amount or Public Provident Fund account proceeds. You can, of course, do it at any age when you have a lump sum to invest like a sign-on bonus, a golden handshake, or a nice pot of money your favourite uncle left you when he passed away, and use the annuity as a supplemental income.
Start early
As logic would tell you, for a given premium, the longer the premium paying period, the larger the annuity. So, it’s worth it to start early, as with all insurance. As a very rough example, a 35-year-old and a 45-year-old will get very different annuities for the same purchase price with their 55th birthday as the vesting date.
Take a target purchase price of ₹2,00,000 a year. If you start at 35, you would receive ₹42,800 per year annuity from age 55. If you start at age 45, your annuity amount from age 55 will be lower at ₹40,900.
An ‘Immediate Annuity’ for the same purchase price will bring only ₹14,400 as annuity per year. When it comes to options on the length and scope of annuity payments, you have a plethora of choices. The simplest is annuity for life. This means that the annuity payment will go on for the lifetime of the annuitant, and no more benefits will be available from the policy.
You can also choose various combinations and options such as annuity certain for 10 years, or 15 or 20 years and for life after that, annuity for life and return of purchase price to nominee, annuity for life and then to a second annuitant for life and so on.
These options have to be finalised when you begin the policy and the amount you will get under each option reflects both the future value of your premium investment as well as the risk coverage that the annuity policy offers. An annuity for life could well extend to 30 or 40 years after vesting age and that risk of living too long is what the premium is meant for. Given today’s realities of longevity, it is a risk you should cover well.
(The writer is a business journalist specialising in insurance & corporate history)