Annuities are suddenly in the spotlight. The proposed tax on EPF (employee provident fund) withdrawal would not be applicable if 60 per cent of corpus is invested in annuity or pension schemes, the government has said.
What are annuity schemes? Annuity schemes are basically pension plans offered by insurance companies in which a person makes lumpsum investment to draw pension for the life time.
There are two types of annuities plans - immediate and deferred. An immediate annuity is a single premium plan in which a person starts getting regular pension, depending on the frequency of payment (monthly, quarterly, or annually).
In case of immediate annuity plan, rate of return from the annuity plan is guaranteed at the time of investment and doesn't change throughout the life. This rate is decided by the annuity provider on the basis of the age at which annuity plan is bought, expected life tenure of the person post retirement, prevailing interest rate and administrative expenses.
A deferred annuity plan can be a single premium or multiple premium in which a person invests a lumpsum or periodic premium to draw regular pension post retirement.
In case of deferred annuity plans, the interest rate is not fixed at the time of purchase. The person gets pension as per the accumulation made over the period from the investments.
But are immediate annuity plans a good option to invest your retirement corpus? There are currently three issues with the immediate annuity plans. First, the rate of return offered by immediate annuity plans is not attractive as they guarantee a fixed rate. In fact, they are even lower than the rate of return offered by bank fixed deposits.
"Immediate annuity plans currently offer a return in the range of 5-7 per cent," says Amit Kumar Roy, chief distribution officer, Aegon Life Insurance Company.
Given the historic high rate of inflation in India, a person is unlikely to be able to beat inflation with such returns.
Second, the pension income is taxable which will drag down the person's income further. For a senior citizen (between 60-80 years of age) income up to Rs 3 lakh is tax-exempt while in case of super- senior citizens (above 80 years), there is no tax on income up to Rs 5 lakh.
Third, if a person invests in an annuity plan, his or her money is locked for a long time.
Annuity schemes give the option to return the premium paid to the legal heir in case of death of annuity purchaser.
What are annuity schemes? Annuity schemes are basically pension plans offered by insurance companies in which a person makes lumpsum investment to draw pension for the life time.
There are two types of annuities plans - immediate and deferred. An immediate annuity is a single premium plan in which a person starts getting regular pension, depending on the frequency of payment (monthly, quarterly, or annually).
In case of immediate annuity plan, rate of return from the annuity plan is guaranteed at the time of investment and doesn't change throughout the life. This rate is decided by the annuity provider on the basis of the age at which annuity plan is bought, expected life tenure of the person post retirement, prevailing interest rate and administrative expenses.
A deferred annuity plan can be a single premium or multiple premium in which a person invests a lumpsum or periodic premium to draw regular pension post retirement.
In case of deferred annuity plans, the interest rate is not fixed at the time of purchase. The person gets pension as per the accumulation made over the period from the investments.
But are immediate annuity plans a good option to invest your retirement corpus? There are currently three issues with the immediate annuity plans. First, the rate of return offered by immediate annuity plans is not attractive as they guarantee a fixed rate. In fact, they are even lower than the rate of return offered by bank fixed deposits.
"Immediate annuity plans currently offer a return in the range of 5-7 per cent," says Amit Kumar Roy, chief distribution officer, Aegon Life Insurance Company.
Given the historic high rate of inflation in India, a person is unlikely to be able to beat inflation with such returns.
Second, the pension income is taxable which will drag down the person's income further. For a senior citizen (between 60-80 years of age) income up to Rs 3 lakh is tax-exempt while in case of super- senior citizens (above 80 years), there is no tax on income up to Rs 5 lakh.
Third, if a person invests in an annuity plan, his or her money is locked for a long time.
Annuity schemes give the option to return the premium paid to the legal heir in case of death of annuity purchaser.
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