One of the key concerns for most investors in any financial product at the time of retirement is about generating a steady stream of predictable income with minimal or almost no risks to their capital.
Among the products dedicated to retirement income, one of the foremost is the immediate annuity option offered by insurance companies.
India’s largest insurer LIC has come out with one such product recently. Called ‘Smart Pension,’ the immediate annuity product comes with various options depending on the different life situations of policyholders.
Read on to explore the key features of the plan and whether it would suit your requirements.
Plethora of options
LIC’s Smart Pension may be a regular immediate annuity product. However, the number of options on offer is staggering. The pension product has as many as 21 withdrawal options across single and joint annuities, with choices to increase the annuity amount at a specified simple rate. There are options to take back the purchase price choice or skip it.
A few variants need to be highlighted here.
There are choices to take annuity (single or joint) up to a certain age (say 75) and then take back the full purchase price or a percentage of it (say 50 per cent).
Increase in the rate of annuity payment at simple rates of 3 per cent and 6 per cent are available.
Then there is a certainty of annuity payment option ranging for 5-20 years. So, if an annuitant were to die within these periods, the nominee will get the pension amount till the end of the specified period and after that all payments cease.
There is one choice given to take the accumulated annuity option. So, annuity payments can be deferred and accumulated in blocks of five years.
Only in options where return of purchase price are chosen, there is a surrender value available. Payments made till surrender are deducted from the purchased price and a surrender factor is applied to the balance amount depending on the policy year in force.
What the policy pays
We take three options from the annuity policy to calculate the likely yields. Single life annuity, single annuity with return of purchase price and joint annuity with return of purchase price.
LIC’s Smart Pension is assumed to be taken for ₹10 lakh – with 1.8 per cent GST, the purchase price will be ₹10.18 lakh. Among the payout periods, the annual payment option is taken.
The main policyholder is assumed to be a male aged 60 years, with his spouse being 55 years old.
Now, the main policyholder is assumed to live till the age of 80. His spouse is assumed to live for 10 more years after his death. So, the main annuitant receives a pension for 20 years. In the case of joint annuity, the spouse gets pension for 10 years thereafter.
For a single life annuity (without return of purchase price), the LIC brochure gives ₹85,000 as the annuity amount. When we take this payout for a period of 20 years on a single premium of ₹10 lakh, we get an annualised yield (XIRR) of 5.78 per cent.
In the case of single life annuity with return of purchase price to the spouse/nominee, the annual payout is ₹81,700. This option gives an annualised yield of 6.34 per cent.
If we take joint annuity with return of purchase price, the annual pension paid is ₹64,300. The yield works out to an annualised rate of 6.29 per cent.
The annuities for options that involve increasing payouts over the years start at much lower levels.
Should you opt for the pension plan?
As seen from the yield levels indicated earlier, it is clear that the returns are fairly modest from the LIC’s Smart Pension. Online purchase from the insurer’s Web site without intermediaries would give an additional 2.5 per cent annuity amount, which still does not improve the returns substantially.
Although returns from annuity products aren’t strictly comparable with other fixed-income instruments, a comparison can still give us a perspective.
Yields on 10-year G-Secs are at 6.7 per cent and those on securities maturing 30 years down the line are north of 7 per cent. Even short-term money market mutual funds are able to give more than 7 per cent returns. SCSS from the post office gives 8.2 per cent interest.
However, if investors have substantial investments for their retirement in avenues such as mutual funds, fixed deposits and direct equities, and yet have a surplus, they can consider LIC’s Smart Pension plan for safe income streams even if returns are moderate.
Alternatively, if you receive a pension from your employer, you can bolster the regular income by parking a small portion of your accumulated corpus in this pension plan if you want certainty, but no risks on your investments.
