In this post, let us discuss whether we should go for Annuities or not. If you don't know more about annuity, just read our earlier post, Annuities: Ultimate Guide. Annuity sounds like a perfect option for your retirement investment. Doesn't it? and this is exactly how products are placed in the minds of the consumers. Whether consumers hardly think that these products may have any disadvantages and they invest in such products, but it is better to know about each and every product in detail that you invest your hard earned money in. So let us see,
The returns from annuities are just simple interest as the profit is withdrawn, there is no question of compounding. Returns of plans to return on the initial investment are lesser than the returns of the plans that do not give away initial investment. Returns from annuities are taxed according to your tax slab. So your post tax returns come down. In deferred annuities, whatever corpus that you accumulate through pension plans, only 1/3 of it can be withdrawn without paying any taxes. The remaining 2/3 of it has to be invested in annuities of the same insurer you had pension plans with. So even if your annuity was a variable annuity and aggressive portfolio with investments into equities, only 1/3 of the corpus would have been tax free. Had you invested the amount in equities directly or through equity mutual funds, the returns have been 100% tax free after just a year of investment.
Once an annuity start giving you pay out, the original investment amount is locked up for your entire life. Unless there are situations like critical illness, etc. the amount will never come to you. Even if you go for plans to return on the initial investment, the initial investment is given to your nominee and never you and even if you try to surrender there are huge surrender charges.
Premature closure of annuities is possible with a penalty in some cases and there are some cases which do not allow surrender at all. Surrender charges vary from insurer to insurer and are based upon the type of plan you go for. In case of immediate annuities, there are some plans which give only 7-10% of your initial investment on surrender and in case of deferred annuities, there is pension plans, the structure is more or less like ULIPS and so the surrender charges are also similar. Now your risk appetite cannot remain same throughout the accumulation phase. There are charges in case of annuities if you want to change your option. That is from an aggressive if you want to change it to moderate or maybe a conservative portfolio. The only good thing about annuities is that it gives you a guaranteed rate of return in case of fixed annuities for a lifetime. But again, the returns are low and the returns are taxed according to your tax slab.
Read: Difference Between NPS and EPF
Friends, in the current article, we tried to discuss all that annuities offer. Hope after reading it, you would be in a position to decide whether you should go for annuities or avoid it.
What annuities actually offer
Annuities offer very low returns, returns from annuities are link to long term interest rates and since annuity periods are long, the investment corpus has to be invested in long term options like government bonds and not too many long term dead instruments are available for the insurance companies to provide fixed rate of returns for the investors for a lifetime. Moreover, insurance companies are conservative and do not pass on all the returns to their consumers. A part of the return is getting to meet contingencies. Returns from annuity of pension plans is below inflation and even the once giving increasing annuities, the increase is not more than 3% each year.The returns from annuities are just simple interest as the profit is withdrawn, there is no question of compounding. Returns of plans to return on the initial investment are lesser than the returns of the plans that do not give away initial investment. Returns from annuities are taxed according to your tax slab. So your post tax returns come down. In deferred annuities, whatever corpus that you accumulate through pension plans, only 1/3 of it can be withdrawn without paying any taxes. The remaining 2/3 of it has to be invested in annuities of the same insurer you had pension plans with. So even if your annuity was a variable annuity and aggressive portfolio with investments into equities, only 1/3 of the corpus would have been tax free. Had you invested the amount in equities directly or through equity mutual funds, the returns have been 100% tax free after just a year of investment.
Once an annuity start giving you pay out, the original investment amount is locked up for your entire life. Unless there are situations like critical illness, etc. the amount will never come to you. Even if you go for plans to return on the initial investment, the initial investment is given to your nominee and never you and even if you try to surrender there are huge surrender charges.
Highest Surrender Charges
Premature closure of annuities is possible with a penalty in some cases and there are some cases which do not allow surrender at all. Surrender charges vary from insurer to insurer and are based upon the type of plan you go for. In case of immediate annuities, there are some plans which give only 7-10% of your initial investment on surrender and in case of deferred annuities, there is pension plans, the structure is more or less like ULIPS and so the surrender charges are also similar. Now your risk appetite cannot remain same throughout the accumulation phase. There are charges in case of annuities if you want to change your option. That is from an aggressive if you want to change it to moderate or maybe a conservative portfolio. The only good thing about annuities is that it gives you a guaranteed rate of return in case of fixed annuities for a lifetime. But again, the returns are low and the returns are taxed according to your tax slab.
Read: Difference Between NPS and EPF
Friends, in the current article, we tried to discuss all that annuities offer. Hope after reading it, you would be in a position to decide whether you should go for annuities or avoid it.
