Tag: annuity

3 important things to note about NPS annuity

Personal Finance

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The National Pension System (NPS) is one of the preferred retirement options, thanks to its low cost structure and tax advantage. But one thing that concerns investors is the mandatory requirement to lock into an annuity product on exit. The requirement to purchase an annuity is for providing a monthly pension after retirement. If you are planning to enter the NPS or are an existing subscriber reaching your retirement age, here are some of the important factors to know about the annuity product.

Under all citizens model, for subscribers on turning 60, it is mandatory to buy an annuity plan with at least 40 percent of the NPS corpus (unless subscriber decides to defer the exit). The balance 60 per cent is paid as lump sum to the subscriber. If the subscriber chooses to prematurely exit from the NPS before the retirement age, at least 80 per cent of the accumulated corpus has to be utilised for the purchase of annuity.

The four main variants of annuities include — Annuity for life (annuity for life time and on death of the subscriber, annuity ceases); Annuity for life with return of purchase price (on death, annuity ceases & 100 per cent of the purchase price is returned to the nominee); Joint life, last survivor without return of purchase price (annuity for life time and on death of the subscriber, annuity will be payable to the spouse for life time. On death of the spouse, annuity ceases); and Joint life, last survivor with return of purchase price (same as earlier, but purchase price will be returned to the nominees on death of the spouse). There’s one more option – ‘NPS – Family Income’, a dedicated annuity option offered only to government employees.

Currently, there are 13 life insurance companies empanelled with the Pension Fund Regulatory & Development Authority (PFRDA), from whom you can select the annuity product. One can use the link – https://cra-nsdl.com/CRAOnline/aspQuote.html – to compare the annuity rates for different annuity variants provided by the all service providers.

Return on investment

When you purchase an annuity, you get a fixed income at the annuity rate throughout life irrespective of interest rate movements. Since the annuity pays you for life-time, it also reduces the risk of re-investment of capital. These benefits come at a cost, though, which get accounted for in the annuity rate.

Currently, the annuity rates for products with the return of purchase price (ROP) are in the range of 5.5-6.6 per cent for an individual of 60 years for an annuity purchase of ₹40 lakh. Though not a perfect comparison, we can look at the return on the ROP annuity products versus that on non-cumulative bank deposits and the Pradhan Mantri Vaya Vandana Yojana (PMVVY). Today, banks are offering 6-6.5 per cent on their ten-year FDs. The PMVVY – with a limit of ₹15 lakh for a single account and a lock-in of ten years – is offering an assured pension of 7.40 per cent per annum payable monthly for all the policies purchased till 31st March, 2022.

There are no investment products that can be compared with the annuity products with no ROP, which pays higher annuity than those with the ROP option. The internal rate of return (IRR), which is an effective way of calculating the return on investment in this case, increases as the subscriber goes on to live longer. For instance, a 60-year old purchases an annuity with annual fixed income of ₹80,000 for ₹10 lakh today. If she lives to 80, her IRR would be just five per cent. But if she lives till 100, then her return jumps to 7.6 per cent.

Annuity products with no ROP can be opted by those with no dependents or liabilities. Note that the income you receive from your annuity plan is taxable at your income tax slab rate.

To overcome the low rates on annuities, PFRDA appears to be working on an option in which the corpus would continue to be managed by pension fund managers but subscriber gets to have periodic payouts, similar to systematic withdrawal plans of mutual funds.

Deferment of annuity

While annuity providers reset the annuity rates periodically, the rate prevalent at the time when you purchase the annuity is applicable to all future annuity pay-outs. Since we are in the low interest rate environment, rates are expected to inch up. Thus, if you are an existing NPS subscriber who is close to retirement and does not need a periodical annuity income, you can defer buying annuity. Also, the longer you defer the purchase of annuity, higher the pension you will get as the number of years over which the insurance company has to pay the annuity comes down. As per NPS rules, one can defer the annuity purchase by 3 years from the time the subscriber exercises the option to withdraw the non-annuity portion (60 per cent, or 80 per cent of the corpus in case of pre-mature withdrawal).

Less scope to alter annuities

Subscribers under all citizen and private sectors can choose from monthly, quarterly, half yearly or yearly payment frequencies (only monthly for government employees). Once an annuity is purchased, the option of cancellation or reinvestment with another annuity service provider or in another annuity scheme is not allowed after the free look period. Surrendering the policy, too, is restricted only to special circumstances such as a critical illness. This would be available only for the annuity option with ROP, however, at high charges.

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Should those above 65 go for the National Pension System?

Personal Finance

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The Pension Fund Regulatory and Development Authority (PFRDA) recently raised the maximum entry age for the National Pension System or NPS from 65 to 70 years.

Should those eligible take the opportunity to invest?

Following the recent rule change, those aged over 65 and up to 70 years can start investing in the NPS and remain invested until they turn 75. Those who had closed their NPS accounts in the past too are allowed to open a new account as per the revised norms.

While there is no official clarification on this from the PFRDA yet, the new rules imply that existing NPS subscribers too can continue to remain invested until 75 years of age as against the current 70 years.

What are the investment choices and tenure options for those subscribing after 65 years of age?

Like every NPS investor, such investors can choose between auto or active choice for their corpus. The maximum equity exposure allowed under these options will be 15 per cent (auto) and 50 per cent (active) respectively.

For those entering the NPS after the age of 65, a ‘normal exit’ can be made after three years of joining. That is, on such exit, they will have to invest at least 40 per cent (tax-free) of their accumulated corpus in an annuity of one of the approved annuity service providers for a regular pension. The remaining 60 per cent (tax-free) will be paid out to them as lump sum. In case of an accumulated corpus of only up to ₹5 lakh, however, they can withdraw it entirely as lump sum. Alternatively, they can remain invested in the NPS any time until 75 and choose to excercise one of the three deferment options – defer only the lump sum withdrawal or only the annuity or both – if market conditions are not favourable at the time of exit. Once a subscriber opts for deferment, no further contributions can be made to the NPS.

An exit before three years will be treated as a premature exit for those entering the NPS after 65 years of age. At the time of such exit, the subscriber will have to use at least 80 per cent of the corpus for purchasing an annuity. Only the remaining 20 per cent can be withdrawn as lump sum. However, if the accumulated corpus totals only up to ₹2.5 lakh, then the entire amount can be withdrawn even though it is a premature exit.

If you are over 65, should you take the opportunity to invest in the NPS?

Not necessarily. While the lock-in until 60 years of age offers a young, early subscriber into the NPS the discipline to remain invested, the same logic may not apply to someone entering after 65 years of age. The NPS helps you build a corpus through investment in a mix of equity and debt. This can be achieved via investing in mutual fund schemes too. The latter is preferable if you need the flexibility to withdraw your money whenever needed.

On exit after three years, at least 40 per cent of the accumulated NPS corpus must be locked in an annuity for a lifelong pension that will be taxed at your income tax slab rate.

Based on the prevalent low annuity rates, the post-tax return (pension income) does not appear attractive, especially so for those in the higher tax brackets.

Today, many NPS annuity service providers are offering monthly annuity for life to a 66-year-old individual at rates of only 5.33-6.31 per cent per annum under return of purchase price (ROP) plan. The returns are better at 8.41-9.28 per cent per annum if you do not opt for ROP.

With someone entering the NPS today, having to opt for an annuity only a few years from now, it remains to be seen if the annuity returns at that point in time are good enough. Also, the PFRDA seems to be looking for an alternative to the compulsory annuity option. Thus, the product features are still evolving.

Thirdly, while a short lock-in of three years is tempting, it must be remembered that NPS is a market-linked product. NPS funds invest in a mix of equity and debt instruments (the latter of a relatively longer maturity). A shorter period may peg up the risk. Holding for ten years up to 75 years of age may make more sense.

Considering all this, the NPS can only be one of the avenues to park your corpus for your silver years. It is best to diversify beyond it.

What other investment options do those aged over 65 have?

For those interested in exposure to both equity and debt, balanced hybrid funds that invest 40-60 per cent of their assets each in equity and debt can be an option. Those interested purely in debt exposure can consider short-duration funds and corporate bond funds with relatively low average maturity of two years or below. The expense ratios may be higher than those for NPS funds but they are more liquid and SWPs (systematic withdrawal plan) can also be initiated if a regular income is needed.

Those who care utmost for principal safety can consider the 5-year senior citizen savings scheme (SCSS) or the GOI’s 7-year floating rate savings bonds (popularly known as the RBI bonds).

The interest rate on the SCSS is 7.4 per cent per annum, which is paid out every quarter. You can invest only up to ₹15 lakh here. RBI bonds too offer an attractive 7.15 per cent per annum, payable half-yearly. While there is a 7-year lock in, you can get the benefit of rising rates, as the interest rate is pegged to the NSC rate (35 basis points over it) and is reset every half year.

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How LIC’s Saral Pension Yojana stacks up

Personal Finance

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To make insurance products easier to understand and choose from, the insurance regulator has been asking insurers to launch no-frills versions of their popular products. LIC launched its Saral Pension Yojana, a simplified version of immediate annuity plans earlier this month. How does it compare to alternatives in the market?

What it offers

Immediate annuity plans from insurers promise to pay you a lifelong pension in return for an upfront investment, which is called the ‘purchase price’. LIC’s Saral Pension Yojana guarantees pension at a fixed rate throughout your lifetime. This should be distinguished from the bonuses paid on LIC’s participating plans, which can vary based on its surpluses each year.

You can choose to receive your pension from this plan on a monthly, quarterly, half-yearly or annual basis. The pension starts in the immediate period after your purchase. If you opt for a monthly payout, you’ll receive your first pension one month after you make the initial investment.

Any investor between the ages of 40 and 80 can buy LIC’s Saral Pension Yojana. This is a slightly narrower range than allowed by LIC’s older immediate annuity plan Jeevan Akshay VII, which allows investments until the age of 100.

Saral Pension Yojana allows surrender after completing six months, at 95 per cent of the original investment, but only if the policyholder, spouse or children are diagnosed with specific critical illnesses.

While Jeevan Akshay offers the choice of 10 different options, Saral Pension Yojana limits its options to just two. You can opt for a single life plan, where you receive lifelong pension with your initial investment (purchase price) paid back to nominees after your death. Or you can choose a joint life plan, where after your passing your spouse or other dependant receives a lifelong pension. After the death of both annuitants, your nominees get your purchase price.

In offering just two options, the Saral Pension Yojana leaves out some useful features from Jeevan Akshay. In Jeevan Akshay VII, you can lock into joint pensions for a minimum guaranteed period of 5, 10, 15 or 20 years irrespective of whether you survive this period (your spouse/dependant will receive it in case of your death). Jeevan Akshay also offers a pension plan without any return of purchase price.

These additional options help you earn higher monthly income from the same purchase price. For instance, if you choose for option E of Jeevan Akshay with a 20-year pension guarantee, you can expect 19 per cent higher pension than with the joint annuity. Option A – annuity for life without any return of purchase price – helps you earn 20 per cent higher pension than that with return of purchase price. This can be useful for folks who aren’t keen to leave a legacy.

Returns

Your returns from LIC Saral Pension Yojana depend mainly on your age of entry and the option you choose. LIC offers rebates based on the size of your upfront investment.

Returns on annuity plans get better with a higher age of entry. Presently, a 60-year-old buying Saral Pension Yojana will get pension at ₹51650 a year (single life), for a ₹10 lakh investment. For 40 or 50-year olds, this pension drops to ₹50650 and ₹51050 respectively. A 70-year old can expect ₹52500 a year. A 60-year-old would receive only ₹51250 under the joint life option compared to ₹51650 under the single life option.

While agents like to plug annuity plans based on the annuity rate which is at simple interest, it is best to use the IRR (Internal Rate of Return) to judge the true returns from such plans. After considering 1.8 per cent GST on your purchase price, the IRR for a 60-year-old investing in Saral Pension Yojana, who lives until the age of 85 works out to about 5.04 per cent per annum on the single life plan and 5 per cent on joint life, considering the return of purchase price.

Annuity income is taxable at your slab rate, lowering effective returns. Annuity rates on LIC Saral Pension Yojana are lower than those on Jeevan Akshay VII, which offers ₹53950 and ₹53650 for a ₹10 lakh purchase price on comparable single life and joint life options.

On the plus side, immediate annuity plans offer a guaranteed income without longevity risk. They may be suitable options for folks who aren’t good at money management or seek certainty above everything else. While choosing such plans, it is safer to go for insurers who are sure to stick around for as long as you live, even if their annuity rates are on the lower side, as LIC’s are.

But such plans offer far lower returns than other regular income alternatives available to seniors, such as the post office senior citizens scheme (current return 7.4 per cent), monthly income account (current rate 6.7 per cent) and GOI Floating Rate Savings Bonds (7.15 per cent). Once you lock into a certain rate in immediate annuity plans, your pension does not rise with inflation or upswings in rates throughout your life.

If predictable income is your main ask and you are 60, you should maximise your investment in Pradhan Mantri Vaya Vandana Yojana from LIC, upto its ceiling of ₹15 lakh, as it offers a 7.4 per cent return with a shorter 10-year lock-in.

Surpluses can be parked in small savings or bank deposits. Given that we are at the bottom of a rate cycle, waiting for an uptick in rates may fetch you better annuity rates even from immediate annuity plans.

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LIC further relaxes claim settlement process

Banking & Finance

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Amidst the second wave of the Covid-19 pandemic surging across the country, Life Insurance Corporation of India has further relaxed processes for settlement of claims.

To facilitate speedy settlement of death claims in the prevailing situation where death has occurred in a hospital, LIC will accept alternate proofs of death instead of a death certificate issued by the municipal authorities.

Alternate proofs of death would include death certificate, discharge summary or death summary containing clear date and time of death issued by the government, ESI, Armed Forces or corporate hospitals and counter-signed by LIC class I officers or Development Officers of 10 years standing along with the cremation or burial certificate or authentic identifying receipt issued by the relevant authority.

“In other cases, Municipal Death Certificate will be required as earlier,” LIC said in a statement on Friday.

Life certificates

For Annuities with return of capital options, production of life certificates is waived for annuities due up to October 21 this year, it further said.

LIC would also accept life certificates sent through email in other cases and has introduced life certificate procurement through video call process.

To address the difficulties experienced by policyholders in submitting documents required for claim settlement in servicing branch, submission of documents has been allowed in any nearby LIC office.

LIC further said that starting May 10, all its offices will work from Monday to Friday between 10 am and 5:30 pm. Saturdays will be a public holiday for LIC.

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