Postponed annuities There are insurance products which are meant to provide you regular income at a future date. There is an accumulation phase, where you make payments for a certain number of years, and then a payout phase when you can choose to receive regular income. Therefore, by nature, deferred annuities are meant to provide regular income in retirement. However, it is not necessarily suitable for retirement purposes. If the agent selling you the annuity doesn’t clearly tell you what you need to know, you may be buying a product that isn’t a good fit for you.
Deferred annuity products are offered as a way to ensure good income generation retirement. Suresh Sadagopan, founder and SEBI-registered investment advisor (RIA), Ladder7 Financial Advisory, says, “Some of the problems in misselling of insurance will apply here too – such as filing of returns, non-delivery of annuity information, etc..” Therefore, it is important to have a clear understanding of how deferred annuity products work.
IRR is important, not an absolute number: Internal Rate of Return (IRR) is a metric that helps one estimate how profitable an investment is. When calculating IRR, the present value or net present value of future cash flows is taken as zero. In other words, it is the effective interest rate you would earn if you estimate that the money you earn from investing is worth in today’s rupees, equal to the amount of money you invest with. Vishal Dhawan says, “The concept of IRR is not given enough attention and very often we come across cases in which absolute numbers are talked about, making it easier for investors to consider the time value of money and the current discounted values. It becomes challenging to connect with.” Founder and CEO, Plan Ahead Wealth Advisors, a SEBI RIA. “IRR is generally between 5% and 7% per annum. It may be conveyed in some cases, but not in all cases,” he adds.
Inflation is the real villain here: Let us know that today your monthly expenses are ₹60,000. If you are 35 years old and want to retire at 60, you will need ₹2.57 lakh in the first month of retirement to maintain a similar standard of living, assuming inflation is 6%. Every month, the amount of money you need will increase.
“A deferred annuity or any product offering regular returns should be evaluated on the basis of the fact that regular returns are due much later in life. Hence, one needs to consider inflation in the intervening period and see What is needed is whether the amount coming in the future is a meaningful amount,” says Sadagopan.
“It is also important to remember that inflation will continue even during the retirement years, so this should also be taken into account,” says Dhawan.
Currently, you are able to withstand inflation as your income grows year after year. This will not happen after retirement. “Having a guaranteed income for life is a great thing. But will the income offset inflation and taxes on a year-over-year basis? If not, the product is not suitable for you,” says Arijit Sen, co-founder and SEBI RIA, Meri Mind.
You need to take into account taxes: There is no tax on the money invested until you withdraw it. Also, under section 80CCC, you can claim deduction of maximum ₹1.5 lakh per annum for the amount deposited by you in the annuity plan from the life insurance company. However, taxation on withdrawals is at normal income tax rate, depending on which slab you are in.
To avoid misselling a product, financial awareness is important. “As practicing financial planners, we are constantly focused on increasing financial awareness among our clients,” says Sen.
The primary thing is to understand what you need. “People usually need regular income after retiring from work-life. but how much? Will regular income from annuity suffice? If so, how long can you survive on regular annuity income? There are questions you need to ask yourself,” Sen says.
If you’ve asked yourself these questions and answered them, you won’t fall for an agent’s sales pitch.
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