Chinmay Bade
Visualise a scenario in a few years from now, where India’s demographics will incline towards a pattern similar to that of developed nations. Higher life expectancy, coupled with socio-economic changes, such as more families moving away from the joint family system will burden individuals in their retirement period to maintain a reasonable standard of living.
We Indians are known to be ‘habitual savers’. However, it is extremely difficult for a layman to take a guess as to what will be the corpus that he/ she would need to create through regular savings, which will last for a lifetime. With improving medical and healthcare facilities and increasing longevity there is a risk of outliving one’s hard earned money. This makes retirement planning imperative for all working individuals.
In India, retirement planning through annuity products has been mandatory for the organised sector. This is done by maintaining a superannuation fund where the employee’s share is transferred to an annuity option of his/her choice to provide an assured income for life.
For the unorganised sector which comprises a larger section of the working population, in the absence of a social security system, retirement planning is a must. Also, one needs to spare a thought to the scenario where an individual does not live long after retirement but their spouse does. In such a situation there needs to be financial support system available for the dependent spouse.
Currently, there are various investment instruments that allow an individual to accumulate a lump sum at retirement. One can choose from a variety of instruments ranging from aggressive market-linked products to conservative, traditional ones which are offered by banks, mutual fund companies and life insurance companies. However, what such instruments typically lack is the guarantee and assurance of fixed income for a lifetime at prevailing interest rates.
Annuity products are the only financial instruments that provide long-term, open-ended guarantees in the form of a fixed income for a lifetime. This annuity income is guaranteed for life, irrespective of whether there is a repeat of a 2008 credit crisis or a reduction in interest rates (dipping from close to 11-13% in the late 90s to about 7% in 2018).
Annuities have some intrinsic benefits that go beyond providing an income stream. The key benefit that annuity products provide is the certainty that your hard earned money will last you for your entire life, and in case you are not around, it will provide continued financial support to your spouse. It guarantees a fixed future income that starts today and continues for the rest of your life. Income from annuities is not impacted by any external factors such as future interest rates or market fluctuations or changes in the macro-economic environment.
Life insurers have been providing annuities for quite some time now and some of the popular annuity structures are:
- Life time annuity – guaranteed income for life at prevailing interest rates
- Life time annuity with return of purchase price - a guaranteed income is paid as long as the annuitant survives. The capital is returned to the nominee on death of the annuitant
- Joint Life Annuity – a guaranteed annuity is paid to a couple as long as either one of them is alive. It may be combined with a return of capital to the nominee after the death of both annuitants
There are two types of annuity products - Immediate and deferred annuity. The choice would depend on your age. Immediate annuity products start generating income immediately – as soon as the next month. These are ideal for those who are retiring in a few months. Deferred annuity products offer you a fixed income which starts at a later date.
Immediate annuity rates are available upfront, which enables one to know what their future income would be. Deferred annuity products are again of two types. The first type enables you to accumulate for a fixed period and start receiving annuity on a future date– the annuity rate here would be difficult to predict as it would depend on the future annuity rates. The second type gives you a guarantee on the annuity rates right at the time of purchase, even though your annuity starts from a future date.
An assurance of a guaranteed return on retirement is an important factor because an individual has to plan for a time bound goal which has long term repercussions, not just for self but for one’s spouse as well.
Thanks to the digital platform, consumers today have the option to do their own research on various life insurance products available. This enables them to understand the product, its benefit and also the quality of service offered by the companies selling the products.
(The writer is Vice President - Products, HDFC Life)
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