Do annuities serve well to boost your retirement savings?

New Delhi: Annuities offer financial security in retirement, but they are not without risks. It is important to carefully consider annuity features and fees before deciding where to invest for a regular pension. You can choose how often you receive fixed payouts, i.e., monthly, quarterly, semi-annually or yearly. So, you don't have to worry about how much money you can withdraw each month without depleting your retirement savings.

Getting rid of the risk factor

Annuity or pension plans are not subject to market or interest rate risk. This means that the pension you expect to receive in a few years’ time will not be affected by current market conditions. Myriad other traditional retirement products such as the Post Office Monthly Income Plan (POMIS), Fixed Deposits (FDs) and Senior Savings Plans are comparatively more prone to reinvestment risk.

If the overall economy's interest rate is falling, the interest rate on these options will fall as well. This also means that when you reinvest your money, you may receive a lower interest rate on your principal investments. However, annuity plans are not subject to this kind of risk. In many cases, the regular income from annuity plans that you receive at the start of the disbursement period will continue for the rest of your life after you retire.

Seeking tax exemption

Sections 80C and 10(10D) of the Income Tax Act exempt most annuity plans from taxation. The Act also allows scope for tax deduction up to Rs 1.5 lakhs under Section 80C on premiums paid against the policy. Furthermore, any income from your life insurance policy is not subject to tax under Section 10(10D). Apart, bonuses and surrender values are included in the deductions, and there is no upper limit to these deductions.

Principal guaranteed

The biggest feature of a fixed annuity is that it guarantees more value than the amount invested. Insurance companies guarantee that the policyholders get their money back on their pension investments.

However, not everything is hunky dory about annuity plans. Investing in these plans has its disadvantages too that many investors tend to ignore.

Low earnings on investments

Annuity plans fetch lower returns compared to other investment options. However, many people still continue to park their earnings in them to benefit from the safety net guaranteed, thus, causing them to forego higher gains in favour of sanity. Though the returns from annuity plans cannot mitigate the effect of inflation, these plans continue to be an important part of many investors’ investment portfolios.

Not enough liquid

Retirement plans do not allow scope for early cash withdrawals. This is primarily because annuity plans are managed like pension funds in which policyholders must stay invested for a long period. Though many insurance companies are now coming out with plans that allow you to partially withdraw your money, seeking early capital withdrawal can be a hassle in most cases.

More expensive

The high management fees and sales commissions charged by annuity plans are a major source of criticism. Furthermore, some annuity plans charge higher costs of investment.

Annuity plans can help in retirement planning, though investors must consider all factors before putting in their money. Though these plans guarantee both income and tax benefits, they also come with drawbacks such as higher charges, early withdrawal and limited investment flexibility.

If you are planning to buy an annuity plan, remember that you are getting yourself into a long-term commitment. This explains why you must consider or reconsider before deciding to put in your money. Take out the time to compare the benefits and drawbacks or else, seek professional advice before deciding how to save and invest for your retirement.