Securing Lifetime Income with Immediate Annuities: Lock in Lower Rates Now
Secure Your Annuities Immediately
As interest rates drop, it's crucial for retirees planning on buying an immediate annuity to snag a higher guaranteed payout for the duration of their life. The bond yields of India's 10-year government bonds have sunk to 6.28% from the start-of-year high of 6.78%, and insurers are scrambling to revise their annuity rates due to the squeeze.
If you invest Rs 20 lakh in an immediate annuity with the return of purchase price, even a mere 50 basis points dip in the annuity rate will shrink your yearly income by a daunting Rs 10,000. Over a 25-year retirement, that could amount to a whopping Rs 2.5 lakh.
Chetan Vasudeva, senior vice president of Business Development at Elephant.in, an insurance brokerage, advises locking in at current rates. Immediate annuities are, after all, an irrevocable commitment. By anchoring in a higher rate, you'll shield yourself against any future plunges in interest rates.
Since most life insurers in India don't offer inflation-indexed annuities, locking in today's fixed annuity rates will not only ensure financial security but offer reassurance for years to come. Plus, the returns are determined by the prevailing interest rates. Bhavna Verma, appointed actuary at IndiaFirst Life Insurance Company, says when interest rates sink, an annuity provider's potential earnings shrivel. That, unfortunately, forces them to offer lower annuity rates. "Timely purchases will guarantee one receives a higher income, insulated from interest rate fluctuations for an entire lifetime," Verma notes.
Immediate Annuity Rates: Breakdown by Provider
Life insurers set immediate annuity rates depending on factors such as the annuitant's age, the amount of money to be annuitized, chosen annuity type, and the prevailing 10-year bond yield rate. For example, for a 60-year-old with a purchase price of Rs 50 lakh, the Life Insurance Corporation of India offers 6.71% for an annuity with life and a return of purchase price, 6.68% for joint life with a return of purchase price. Without return of purchase price, the rate is 9% for life and 7.74% for joint life. SBI Life offers 6.8% and 6.77%, respectively, and 7.96% and 7.19% for the same options without a return of purchase price.
Assessing Your Immediate Annuity Needs
The degree of financial liquidity needed and the needs of your family are vital considerations when deciding on an immediate annuity plan. Fixed annuities offer steady, predictable payouts, which can bring tranquility during planning and budgeting, while variable and indexed annuities might feature the potential for higher returns but with increased complexity and risk.
Casparus Kromhout, Managing Director and CEO of Shriram Life Insurance, recommends focusing on maximizing monthly income if you want a single life annuity. But if you're searching for peace of mind for your spouse and hope the investment will be returned to your family, joint or return of purchase price options could be more suitable.
Prior to purchasing an immediate annuity product, pay attention to details like payout frequency, single/joint-life cover options, rate of the purchase plan, inflation protection coverage, and more. Rakesh Goyal, Managing Director of Probus, believes an individual should factor in household expenses, medical needs, and other additional income sources before committing to an immediate annuity plan.
Preparation for Taxation on Annuity Income
It's essential to remember that, while annuities are generally tax-deferred, any interest earned from annuity payments is subject to taxation as ordinary income when withdrawn. Vasudeva suggests not allocating all of one's retirement funds to annuities, as these plans are mostly focused on steady income and may not provide the necessary liquidity in emergencies.
- The drop in interest rates highlights the importance for retirees to secure a higher guaranteed payout with immediate annuities, as a decrease in annuity rates could significantly impact their yearly income.
- As most Indian life insurers do not offer inflation-indexed annuities, locking in current fixed annuity rates not only ensures financial security but also offers protection from future interest rate fluctuations.
- In the world of Defi (decentralized finance), investors might consider digital annuities as an alternative, as these platforms offer potential yields not directly tied to traditional interest rates.
- When assessing immediate annuity needs, it's essential to consider factors such as financial liquidity, family needs, payout frequency, and the level of complexity and risk involved with different types of annuities.
- Keep in mind that annuity income is generally tax-deferred, but the interest earned is subject to taxation as ordinary income when withdrawn. Therefore, it's wise to allocate retirement funds wisely, balancing annuities with other investments to ensure needed liquidity in emergencies.
