How to Compare Immediate Annuity Plans in India
The market for Immediate Annuity plans in India is just beginning to emerge. In the time to come, this will emerge as a favourable avenue for retirees to park their funds and get an income from it till the end of their lives.
Parameters to compare immediate annuity plans in India
1. The Type of immediate annuity plan that YOU want
There are several types of immediate annuity plans. When you compare, ensure that you are comparing between the same type of plans from different companies. e.g. if you are comparing life annuity option with joint life last survivor from one insurance company, ensure that the same type is chosen when you look at options from other companies. Also ensure you consider the fact whether the pension is paid at the beginning of the month/quarter/half-year/year, or at the end of it.
2. The Annuity rate offered, in addition to the time-frame of guarantee
Probably the most important parameter. Some companies show you the annuity rate e.g. 7.15% p.a. while some others will show you the annuity itself, e.g. Rs. 43,667 per month. Obviously, choose the higher value irrespective of whether it is a % or a value. This should be done after you ensure you are comparing the same type.
Please note that annuity rates keep changing almost every month. They follow the trend on interest rates and long term paper (issued by the Govt.). So if the rates are likely to trend up, you may want to wait a little while. If they are trending down, but the plan at the earliest.
3. The Surrender option (or withdrawal or liquidity option), if any
Let me first explain the meaning of surrender. Not all of us may know that.
Once you start taking the annuity, if you feel that you want to stop it (for whatsoever reason), you need to tell the insurance company that you want to ‘surrender’ the annuity plan. The insurance company will then deduct a charge (called surrender charge) and return you with a certain amount of money (called surrender value).
Please note that surrender of an immediate annuity plan can be done…
… only if the contract of the annuity plan allows it in the first place, and
… only for certain types of annuity options.
Unfortunately, at the time this article is being written, Indian insurance companies do NOT offer immediate annuity plans with Surrender / Liquidity option.
4. The Convenience of getting the annuity each month/quarter/annually,
Yet another factor is the way you receive the annuity. The convenience of getting it in a certain way will make a difference perhaps not when you are in your 60s, but definitely when you are in your 80s and 90s.
If the insurance company is going to send you a cheque every time and expect you to go to your bank and keep depositing it each month, there will be a time you will be tired doing all that. Wouldn’t it be great if they were to directly credit it into your account electronically?
Sometimes, insurance companies may offer you an annuity card which is like an ATM card and which you can use to withdraw money from your annuity account whenever you need it.
Some insurance companies also offer to give you interest on the unused annuity amount which could be lying idle in your account.
5. The Financial Strength of the Company you are buying it from
This is yet another very important factor to consider. Remember that an annuity is a guaranteed payout for life. If you were to live for say 40 years after starting the annuity, it means that the rate of annuity that you were promised when you started the annuity will be maintained throughout the 40 years and the insurance company is liable to pay you that amount. Even if the interest rates were to drop, the insurance company has to continue paying you at the promised contracted rate. To the insurance company, this is a big risk to take. In the UK, some companies did that and ended up closing down since they did not manage that risk prudently.
This makes the decision of choosing the insurance company a very important one. We thankfully have the IRDA which sets the norms as well as closely reviews the extent of risk that each company makes. But within the companies that are there, it makes immense sense to choose one with a long stable track record, high solvency ratio and robust policies for investment. The company that offers the highest annuity is NOT necessarily the one that you should go for.
How to Compare Immediate Annuity plans
The best way to compare immediate annuity plans in India is to use an insurance comparison website. We are yet to see them start offering this product for comparison. But the speed at which things are moving on the internet, expect such comparisons to come up very soon.