Annuity plans by life insurers gain traction. Should you invest?

• Follow

The Covid-19 pandemic has brought to the forefront uncertainties of life and that’s why people are flocking more towards annuity plans that offer guaranteed returns over the long term. These plans give an advantage of locking interest rates at higher rates than what might prevail in the future, and experts say as India moves to be developed economy inflation will fall and also the interest rates. The Reserve Bank of India (RBI) slashed the repo rate from 6.50% in 2018 to 4.00% in May 2020.

“Covid-19 has made people realise the importance of financial planning and within that, the retirement planning component has gained significant traction. In an environment where interest rates tend to fluctuate, annuity products offer guaranteed regular income for life. Our innovative product Guaranteed Pension Plan has enabled us to grow our annuity business segment by 120% in FY2021 vis-à-vis FY2020,” said Amit Palta, chief distribution officer at ICICI Prudential Life Insurance.

During the first quarter of this financial year, the insurer’s annuity APE grew 164% and non-linked savings were up 66% YoY. Annualised Premium Equivalent (APE) is the sum of the regular annualised premium from the new business plus 10% of the first single premium in a given period.

Annuity plans offer guaranteed returns throughout the life of the annuitant. They don’t change, unlike other instruments. These rates depend on the customer profile like age, gender and the annuity plan option chosen by the customer.

“Overall annuity segment has grown despite having a slowdown due to Covid-19. As compared to FY20, we registered a YoY growth of close to 46%,” said Srinivasan Parthasarathy, chief actuary, HDFC Life. The company has reported strong growth of 61% in annuity business for Q1FY22.

Types of annuity plans

Immediate and deferred annuities are the two most popular types of annuity plans. In an immediate annuity, the guaranteed pension income starts immediately after buying the policy. Under the deferred annuity option, you need to invest first anywhere from 1 to 10 years and then the payment period starts. The longer the deferment, the higher is the regular income.

Should you invest in annuity plans?

Before investing, remember that you need to pay tax if the income exceeds the taxable bracket, as pension is the taxable income. Moreover, it is never good to put all your eggs in one basket. Therefore, do not depend solely on annuity plans for regular cash flow. You should consider diversifying your retirement funds among rental income, interest income on a bond or fixed deposit, a systematic withdrawal plan from mutual funds, or even dividend income for creating a regular stream of income.