Buy right annuity plan, retire rich

Indeed, the growing life expectancy in the country poses a challenge - of managing the risk of
living long, particularly in a society that is increasingly moving away from the financially
secure confines of the joint family system.
However, coming-to-terms can be relatively easy when you have planned for it meticulously
during your earning years. In fact, a well-charted retirement process can even act as a
springboard for a brighter future, besides ensuring peace of mind.
All you need to do is to save and invest wisely to build a handy sunset-years kitty. Be it
creating a corpus through equity, mutual funds and fixed deposits or buying a pension plan.
In case of the latter, you will have to undertake the vital task of buying annuities, when the
accumulated amount is handed over to you.
NEW PENSION REGIME IN FOCUS
Annuity-buying process gains significance particularly in light of new Irda guidelines on
pension plans which have heralded several changes. Under the new regime, among other
things, policyholders will not have the choice of approaching the insurer which offers the
best annuity rates at the time of vesting.

This has been done to reduce the burden on PSU behemoth LIC, which rules the space at
present. This makes it imperative for them to choose wisely while buying a pension plan
itself, factoring in the insurer's capabilities.
"A full provider evaluation does become an important factor to be considered upfront when
buying a pension plan. In addition, track record in managing the corpus, charges and fees,
transaction convenience, payout history, etc, become important to evaluate," says Vishal
Kapoor, head of wealth management, Standard Chartered Bank. While rates are important,
your decision cannot be based solely on the ones being offered at present.
"Do note that the annuity rate at the time of buying a pension plan need not be an indicator of
what you would get when you need to buy annuities in future," cautions Sanjeev Pujari,
appointed actuary, SBI Life.
So far, nearly 21 products have been filed with the insurance regulator for approval since the
new norms became effective from January 1, 2012.
Last week saw the launch of MetLife's deferred annuity, or pension, plan. Also, SBI
Life launched an immediate annuity scheme.
CHOOSING THE RIGHT ANNUITY STRUCTURE
Annuities refer to the stream of income an insurer pays at regular intervals until your death or
the end of tenure you may have opted for. The corpus at the end of the accumulation phase
will be paid out in two parts - 1/3rd in the form of lump sum, with the remaining being
converted into annuities. Now, you need to 'buy' annuities using the amount accumulated by
your pension plan or any cash lump-sum. And the annuity option you choose would depend
on your requirements and expectations from the plans. This would be applicable primarily to
those who may have built the corpus through pension plans until January this year and others
with a fund pool. As mentioned earlier, those buying pension plans henceforth will have to
settle for the annuities offered by their insurer.
Within the basket of annuity plans offered by your insurer, though, you still have to use your
discretion. This would be applicable to everyone looking to buy annuities - irrespective of the
date of purchase. "While zeroing in on the right option, you need to ponder upon three
questions - what kind of income you would require, whether your annuity requirement would
go up or remain the same throughout your life-time and whether you would like to redirect
the proceeds to your spouse upon your death," says Pujari of SBI Life. Adds Kapoor of
StanChart: "Customers should look at the expected rate of return (annuity rate) net of
charges, the period of annuity desired (whether for life, or for a fixed period), flexibility in
joint ownership and payout while buying annuities."
KNOW YOUR ANNUITY
After an evaluation of your requirements, you can get down to the business of choosing an
annuity option that fits your need best. Broadly, annuity plans are categorised into five
segments although the range of options could vary as per the insurer.

ANNUITY PAYABLE FOR LIFE: The annuitant is paid a fixed annuity at regular intervals
throughout his life. The insurer stops paying pension after the annuitant's death. This is
suitable for those who do not have any obligation post death. This option offers the highest
amount of pension for an individual compared to any other options available.

ANNUITY PAYABLE FOR LIFE WITH A GUARANTEED PERIOD: Here, annuity is

paid for certain number years, (say the chosen term of 10 years) and thereafter as long as the
annuitant is alive. Shorter the guarantee period, higher is the pension. Annuity stops upon
either the death of the annuitant or completion of the guaranteed period, whichever is later.
This is a simpler tool to ensure income for the family for a stipulated period of time. For
example, say the annuitant retires at a time when s/he is still the sole earning member in the
family, but expects the kids to take over after five years; such individuals can look at annuity
that is guaranteed for five years.

LIFE ANNUITY WITH RETURN OF PURCHASE PRICE: This option could work for
those who want to leave a legacy for their nominees to inherit. Here, the annuitant enjoys the
pension till s/he dies. After the death of the annuitant, the purchase price of the annuity (that
is, the premium paid by the buyer of the annuity) is handed over to the nominee. This is a
popular option as both the annuitant and the nominee stand benefited. Some new variants also
offer to get the purchase price back in parts.
LIFE ANNUITY INCREASING AT A FIXED RATE : Under this option, there is an
increase in the annuity amount payable per year at a certain rate, say of 3-5%. "While it is not
linked to the actual inflation rate, the rationale is that it would take care of the increase in
expenses to an extent," says Pujari.
JOINT LIFE AND LAST SURVIVOR ANNUITY: As the name denotes, annuitant is
entitled to receive the pension throughout his lifetime. If the spouse survives the annuitant,
the former is also entitled for the pension, ensuring 'life-style maintenance' of the spouse. The
buyer can further choose the quantum of pension (50% or 100% of the annuity payable to
annuitant) payable to the spouse.
ANNUITY VERSUS OTHER INVESTMENTS
The advantages notwithstanding, you would do well to refrain from putting all your eggs in
the annuity nest. "Annuity income is taxable. Therefore, while buying one, you should ensure
that your annual income from annuity is within the 'no-tax' limits," says Lovaii Navlakhi,
managing director and chief financial planner, International Money Matters. Besides, you can
also consider other tax-efficient avenues such as short term debt mutual funds or tax-free
bonds. "Annuity income is fixed, and if the interest rates move up, you may not get to
participate in it.
That makes it all the more important to ensure that you portfolio gets some exposure to
instruments that are liquid," adds Navlakhi. In other words, you would be in a secure position
if you have allocated your savings amongst a mix of products that complement each other.
Remember, while retirement is seldom thought to spell happiness, a carefully planned one
will ensure you close your professional innings with your head held high.