Annuities: A good investment for steady income during retired life

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A large section of pensioners invest their retirement benefits in schemes which yield the maximum interest and utilize the amounts to meet their daily expenses. However, there are several risks involved in these investments. In such a situation, annuity schemes are favoured by many pensioners as they ensure regular returns which are adequate for daily needs.

What are annuities?

Annuities are long-term investments which offer assured returns at regular intervals. Employees retiring from regular service can invest the money they receive as superannuation benefits and other savings as a corpus fund in an annuity scheme. This would enable them to receive returns during the entire term of the scheme, which could last till their lifetime.

Interest rates fluctuate and when they fall, wouldn’t the returns from annuity schemes also decline?

Pension schemes offer returns at the lowest existing interest rates when they are renewed. However, payments under annuity schemes will be equal to the sum promised at the time when the investment was made. Moreover, not only will the beneficiary receive the assured amount during lifetime but the spouse also will continue to be paid the returns till his or her demise.

In the event of the death of the beneficiary of an annuity scheme, would the legal heirs receive the invested amount?

Various annuity policies exist. Some ensure payments till the lifetime of the policy holder and spouse, after which the invested amount is returned to the legal heirs. Under other policies, the amount is returned to the spouse or legal heirs as a one-time payment or as installments.

As living expenses are rising every year, wouldn’t annuity schemes involving payment of the same amount be insufficient to meet the daily needs?

There are annuity schemes which offer larger amounts each year. Such policies which witness an increase of three-percent of the annuity could be chosen. Pensioners can also make a large initial investment so that the annuity would be high. The amount received as annuity depends on the age of the policy holder, the term of the payments, whether the spouse should continue to receive the payments after the demise of the policy holder and other factors. All firms offering annuity schemes publish these details in advance.

Should an employee wait till retirement to invest in an annuity scheme?

No. An investor can choose one from among two annuity schemes. One involves making investments during the period when the policy holder is employed and receives annuities from the time he or she decides to retire from service. Under the second scheme known as ‘immediate annuity’, the investment is made immediately before retirement and annuity amounts are received at regular intervals soon after.

Can you withdraw the money invested in an annuity scheme in the event of an emergency?

Under Indian laws, amounts invested in annuity schemes cannot be withdrawn during the lifetime of the policy holder. In some countries abroad, investment made with one company could be transferred to another firm. However, Section 1035 which deals with policy change has not come into effect in India. However, loans are available under some deferred annuity schemes.

From where can you purchase annuity policies?

Annuity policies are sold by life insurance companies. In India, around seven firms have been recognized as annuity service providers to invest corpus amounts in the National Pension Scheme. These firms include Life Insurance Corporation (LIC) of India, SBI Life, HDFC Life and ICICI-Prudential Life.

Are regular annuity payments received by a policyholder taxable?

An investor has to mention the annuity amounts as income while filing tax returns each year and pay the required tax. However, deductions are available for investments made in annuity schemes and the amount returned in the event of the death of the policy holder.

What are the main drawbacks of annuity schemes?

The annual returns are relatively low at 4-6 percent. Investors cannot transfer their annuities to other firms when the interest rates rise or the services of the company become poor. The installments received by the policy holder are calculated as simple interest.

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