Over the past two decades, India has emerged as one of the world’s fastest-growing economies. As per Crisil estimates, the Indian economy will cross $5 trillion and inch towards the $7 trillion mark between financial year (FY) 2025 and FY2031. This economic growth will create opportunities but will also lead to a fall in interest rates.
India is poised to stand out globally and at the same time the country will witness a significant growth in its elderly population. With increased life expectancy, there is an increased need for retirement planning.
Amid this backdrop, we believe that annuity products make a compelling proposition. These products are best suited for retired individuals since they prefer to receive regular income. In simple terms, in an annuity, the rate of interest at which the regular income will be paid out is fixed at the time of purchase and this interest rate remains constant throughout the customers’ life.
Interest rates to fall
Historically, we have seen that as a country progresses towards development, interest rates fall. Furthermore, a strong and resilient economy, such as ours, will continue to attract foreign investment, and thereby impacting the interest rates. Recently India was included in the JP Morgan’s Global Bond Index. This move is expected to bring in foreign flows of up to $30 billion. With India being well on the path of becoming a developed nation, interest rates are expected to fall.
On the demographic front, we will witness a tectonic shift over the next two decades. As per the recent United Nations report, the overall population of India is likely to grow by 27 per cent between 2015 and 2050. However, during the same period, the elderly population will grow by 171 percent per cent and significantly outpace the overall growth. With increased life expectancy, there will be an increase in the need of retirement products. This will further result in lowering of interest rates as the demand for such retirement products goes up.
Also read: Which is the best annuity option?
Annuities for regular income
Retirement planning is crucial and consists of the accumulation and income generation phases. A section of the country’s retired population depends on fixed income products as a steady source of income. While this option offers predictable returns but is not insulated from interest rate movements.
Annuity products enable individuals to systematically accumulate the required savings pool and then pays out guaranteed income for life, enabling financial security. When an annuity product is purchased the rate of interest is locked in permanently. Hence, it does away with the reinvestment risk for individuals. Now, that we are at a point where interest rates are high, it is advantageous to lock in that favourable interest rate for life.
Another notable feature of annuity products is the joint-life option. This feature ensures the spouse, or the second holder, receives the guaranteed regular income after the first holder is no more. After both holders are no more, the purchase price is paid out to the nominee, facilitating legacy planning.
As India continues to be firmly rooted on its trajectory of economic growth, individuals must continue to manage the reinvestment risk in a falling interest rate environment. It is imperative for each one of us to have a well-planned retirement plan customised to our financial goals and aspirations for life after retirement. Annuities emerge as the viable solution, offering excellent opportunity to lock in the interest rate and receive a life-long steady guaranteed income stream.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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