As per the latest UN estimates, India’s life expectancy, which is presently around 70 years, will hit 82 by 2100. This is undoubtedly good news.
Growing life expectancy reflects better access to nutritious food, clean water, vaccination, medical treatment, and increasing health awareness among other things.
However, longevity also comes with financial risks. How will you make it through the many years after you retire if you don't have a reliable and steady income?
Gone are the days when retirement was primarily about resting and taking care of necessities like food and medicines.
There are many exciting things to do in today’s world, and retirement is a great time to try them out.
As a retiree, you should be free to spend your time as you please, whether it is unwinding with loved ones, travelling the world, volunteering, or taking on new challenges and pursuing your hobbies.
So, it goes without saying that it is prudent to make financial provisions for retirement while you are still gainfully employed.
The Indian financial market offers a wide range of retirement-friendly products, which can be broadly classified into two categories: products that help you build a substantial corpus by the time you retire and those that ensure you a steady income stream in your retirement years.
Annuity plans fall into the second category. An annuity is a type of pension product in which you make a one-time lump sum investment and receive a series of equal or increasing payments called annuities at regular intervals during your post-retirement years.
An annuity plan is basically a contract between two parties: the insurance company and the buyer.
When you purchase an annuity plan, the insurance company will invest your funds and provide you with guaranteed regular payouts based on the earnings from the investments.
Annuity Plans come with several options. You can purchase an annuity plan by paying the premium as a lump sum or in instalments over a period.
You can choose to receive your payouts monthly or annually, either for a stipulated duration or for the rest of your life.
If you are only a few years into your career and far away from retirement, you can choose a deferred annuity plan,’ in which annuity payouts begin at a later date.
If you are about to retire and want payouts to start immediately, you must go for an ‘immediate annuity plan’. There are multiple choices offered in annuity products.
For the life annuity option, the annuity payment stops after the death of the annuitant (policyholder) and the policy terminates.
However, if the policyholder has chosen the annuity with the return of purchase price option then also the annuity payment stops after the death of the annuitant but the purchase price is paid back to the nominee and then the policy terminates.
Furthermore, certain single premium annuity plans provide a joint-life option as well in which regular pay-outs are made to the second annuitant in the event of the death of the first.
You can buy a fixed annuity or an increasing annuity depending on your need. The former offers a level income but starts at a higher level, whereas the latter starts at a lower level but increases with time and so it may help to mitigate inflation challenges.
These and other customizable features make annuities an appealing and worthwhile investment for retirement. After all, retirement is not the end of the road.
As American author and puppeteer Fred Rogers rightly put it, “Often when you think you’re at the end of something, you’re at the beginning of something else.”
With retirement begins a new chapter of your life. If you have limited sources of income at this juncture, you run the risk of losing your financial security and freedom, and it becomes difficult to enjoy a life of quality.
Even if you are going to retire with a pension, or have other financial products in your kitty, it would be wise to augment it with an annuity plan, considering the ever-increasing cost of living and, more crucially, medical inflation, which is double the rate of retail inflation.
A regular income stream from an annuity plan covers your routine expenses, gives you peace of mind and keeps you from getting into situations where you have to liquidate family assets to meet emergencies.
Annuities are the greatest bet in a falling interest rate scenario since they help you lock in the rate for a lifetime. They help you diversify your financial portfolio and function as a safeguard against volatile markets.
Including annuity plans in your financial planning is more vital than ever in today's gig economy where employment systems are becoming more informal, the organised sector is shrinking, pensions are non-existent in private enterprises, and layoffs are commonplace.
In countries such as India, where universal social insurance policies are a far cry, building a corpus to ensure a steady source of income for your sunset years makes perfect sense.
(The author is Chief Actuarial Officer, Aditya Birla Sun Life Insurance)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.
