A question of (right) choice

Long innings:Purchase price paid towards an annuity includes a risk premium for longevity.Arunangsu Roy ChowdhuryArunangsu Roy Chowdhury  

Having decided to buy an annuity policy, you can choose from various options. Before that, let us look at the tax implications.

Up to Rs. 50,000 per year of your annuity purchase price brings you a tax deduction under Section 80CCC of the Income-Tax Act, 1961. This is over and above the Rs. 1.5 lakh under Section 80C for life insurance policy premiums, Employee or Public Provident Fund and so on. Any contribution to the National Pension Scheme will also come under this Rs. 50,000 umbrella.

On the vesting date, you can commute up to a third of the accumulated amount without tax and the balance is applied towards the annuity. The annuity itself, the pension payments you receive after vesting date, are taxable as part of your income. This is important when you plan your post-retirement income flows.

How would you like to receive your annuity is the next decision.

This is a choice you have to make while purchasing the annuity and cannot change.

There are about a dozen options that most life insurance companies offer. The simplest one is annuity for life, which involves annuity payout until your lifetime. This can be on a single life or joint life with your spouse. You can opt for annuity guaranteed for a certain period (5, 10 or 15 years for example) and then for life and the payout will be for the longer of the two. Then, there is annuity of any of the above options with return of purchase price to your nominee. Some firms offer options of a specified portion of your purchase price to return, 50% or 100%, and options where the annuity rises at a specified rate year-on-year, to match rising costs of living. All these choices impact the quantum of your annuity.

Immediate annuity

A 45-year-old would pay Rs. 6 lakh or so for an immediate annuity of Rs. 43,000 a year for his lifetime.

Should he want a guaranteed pension for 20 years and then for a lifetime, the purchase price would be a bit higher at Rs. 6.5 lakh. With return of purchase price, an annuity for life costs Rs. 7 lakh approximately. In case of a critical illness or an accident leading to permanent disability, your annuity policy can come to your rescue by way of return of purchase price.

This is a rider, an additional cover you have to buy at the inception of the policy.

These optional extras differ by company and policy and can cover accidental death and dismemberment, waiver of premium, etc.

One important decision you have to make is whether you want a unit-linked annuity. In a linked annuity, your premium over the years is invested in capital markets and the corpus that results on the vesting date will be your purchase price. So, your capital available to invest in an annuity is subject to market risk, something you have to be aware of.

One question that comes up in the mind when you calculate the ‘return’ rate on an annuity is, even a bank fixed deposit appears better. Maybe, but don’t forget that the premium or purchase price you pay towards an annuity includes a risk premium for longevity.

( The writer is a business journalist specialising in insurance and corporate history )

  • Up to Rs. 50,000 per year of annuity purchase price brings you tax deduction under Section 80CCC

  • This is over and above the Rs. 1.5 lakh under Section 80C for life insurance premiums