Annuity Plans – Merits and demerits

Raj Kumar retired from a private job. He received  Rs 60 lakh from his Provident Fund and gratuity. He wanted to begin a fixed deposit to ensure a regular income of approx Rs 3 lakh per year. In the bank, he was advised to take an annuity plan in place of a fixed deposit. He was assured a guaranteed monthly income of approx Rs 22500 till he lives whereas income from the fixed deposit is guaranteed for 3 years and may change after 3 years. Raj Kumar was perplexed and was not able to decide between a fixed deposit and an annuity plan. 

Most retiring people face this problem and fall victim to misselling and fraud which happens because of wrong advice by Bank officers. Bank earns commission from Insurance companies hence Bank give heavy targets to their staff on the selling of annuity plans. The public generally trusts banks and gets trapped into sales pitches of Bank staff.

Hence it is important that we all understand the difference between fixed deposit and annuity products before we agree to sign on the dotted line 

First, let us understand fixed deposit :

Fixed Deposit:  It is a short-term deposit where Bank agrees to give interest on a deposit at the prevailing interest rate. Key features are given below :

• Bank offers fixed deposit for not more than 3 year. It is also called a Term deposit 
• Interest rates are guaranteed for the term.
• Accrued interest is taxable and added to income.
• As per section 80 TTA, accrued interest up to Rs 40000 is tax-deductible for all and Rs 50000 is tax-deductible for senior citizens.
• Bank would charge 10% TDS on interest accrued if PAN details are given and 20% TDS in PAN details are not given. It is advisable to add the annual interest income on annual basis rather than on maturity.
• In case, TDS is not applicable then the depositor needs to submit form 15G or 15H. 
• Interest rates can be revised on renewal of term deposit hence not guaranteed. For example, a term deposit of Rs 60 lakh on 6% interest would give an interest income of Rs 360000 for 3 years but after 3 years the interest rates may go down to 5% and income would reduce to Rs 300000 for the next 3 years through the inflation would have increased.
• Fixed deposit can be terminated at any time and one can get a full deposit for an emergency.
• There is no GST  at the time of taking a fixed deposit. Hence you pay the purchase price only.

Annuity :

• An annuity is an Insurance contract that covers the risk of living too long.
• A tax of 1.8% is taken hence one will be paying Rs 61.08 lakh to purchase an annuity of Rs 60 lakh 
• An annuity provides a guaranteed income irrespective of the fluctuation of the interest rate. 
• For a purchase price of Rs 60 lakh, one would get a pension of Rs 280000 per year till one lives. On death, the same pension would continue for the spouse if the option is taken.
• The full annuity amount is taxable and added to income. There is no rebate like section 80 TTA which allows a deduction of up to Rs 50000.
• The purchase price is given to the nominee only if the option is taken else the money can be forfeited.
• Bank earns approx 2% commission on Immediate Annuity hence they are keen to sell.

An annuity is a complex contract that needs to be understood. One should buy only after understanding the contract else the probability of fraud is very high. Merits and demerits are given below :

1. An annuity is a guaranteed contract ensuring regular income at your convenience. Interest rates fluctuations would not impact your income. There are LIC annuity schemes that are still giving  12% to annuitants though the interest rates have gone down to 5% now. As per international trends, interest rates may fall to 2% buy an annuity bought today would still enjoy annuity at the rate of 4.8%.
2. An annuity protects old people from emotional blackmails by children whereas old people give their deposits to children for their growth. There are enough examples in society when old age people suffer in hands of children. So if one wants to live with dignity then annuity products can be helpful.
3. In case of emergency, the annuity purchase price can not be used as it is stuck in a contract where this money can not be used.
4. An annuity is an expensive contract due to 1.8% GST and no rebate on income.
5. If an annuity contract is made without understanding then it may be very damaging. Most bank staff make you sign on the dotted line without understanding your need.

Points to remember while buying an immediate annuity of Rs 100 lakh :

1. First, use Rs 30 lakh in the Post office Senior Citizen scheme by husband and wife (Rs 15 lakh in each pan of age 60 and above ) to get an annual interest of 7.4%.
2. Take the Monthly income scheme of the Post office ( Rs 4.5 lakh in each PAN ) to get a monthly income @ 6.4%.
3. Begin a fixed deposit of Rs 20 lakh as a Term Deposit in the Post office or Bank.
4. Use balance Rs 50 lakh for Annuity ( Annuity for self then to spouse and return of purchase price to the nominee ) in annual mode 

Beware of fraudsters, telecallers who promise many attractive schemes to senior citizens. Please stay away from greed in your old age.