Time and tide wait for no (wo)man! Ageing is an inevitable process and someday you will have to hang up your boots either because your employer wants you to do so because of company norms or because your health will inhibit you from working.
Even after you stop working, bills will not stop coming in. You will have to pay for groceries, the telephone, Internet, electricity, water, and so on. Will your savings suffice and help you live comfortably for an undefined period? Statistics give average life spans. But some people would be above that average whereas some others would be below. What if you outlive your savings during your retirement?
The Annuity Assurance
Senior citizens should enjoy old age rather than endure it. This is where annuities step in. An annuity is a type of insurance that promises you, lifetime income, post-retirement. When you first start earning, your immediate priority becomes rearing a family and improving your lifestyle. But at the same time, if you set aside some portion of your income to build your retirement kitty, you will have a corpus that will allow you to lead an equally good lifestyle post-retirement.
Annuities are useful because your retirement corpus will be used by the insurance company to give you returns at pre-defined intervals.
Types of Annuities
There are different types of annuity options available and some of the prominent ones are listed below:
1. Life annuity
Annuities are paid in the opted frequency (monthly/quarterly/yearly) until your demise.
2. Life annuity with return of purchase price
You will get annuity pay outs in the opted frequency (monthly/quarterly/yearly) until your demise. After your demise, the corpus used to purchase the annuity is paid to your nominee.
3. Annuity payable for a guaranteed period
The annuity is paid for the guaranteed period, even after your demise. Annuity stops either on your demise or on completion of the guaranteed period, whichever is later.
4. Joint life annuity
Annuities are paid until either you or your spouse is alive.
5. Joint life annuity with return of purchase price
These annuities are paid until you or your spouse is alive. After the demise of both, the nominee will get the amount initially invested.
When is Single Life Annuity Better?
A single-life annuity pays only until your demise or until the end of the guaranteed period, whichever is earlier. It is suitable only if you do not have any financially dependent family members or if your spouse has their own annuity/pension plan in place.
Few of the conditions when it might be ok for you to consider a single-life annuity plan are:
a) Your spouse has a separate annuity plan
b) Your spouse is older than you
c) You already have an adequate joint-life annuity together
d) Your annuity plan has a life cover until your demise
One of the key points to consider is whether your spouse can survive without getting any portion of your income. If no, then factoring in some portion of income for the spouse is advisable.
The only factor that will influence your choice is, ‘how financially independent is your spouse after retirement?’ If not, the first course of action should be to ensure that your spouse will have financial support even after your demise.
A joint-life annuity is one way to ensure that support.
How does Joint Life Annuity Work?
In the case of a joint-life annuity, money is paid to you until your demise and to your spouse until his or her ultimate demise. This arrangement gives you peace of mind that your loved one is financially secure even when you are not around.
A joint-life annuity is useful if your spouse does not have their own annuity/pension plan or if the plan will not be sufficient to meet the financial needs.
Payments could be a little lower, but they do last longer. You can also decide the proportion of your pay out to be paid to your spouse. Therefore, your spouse may receive 100%, 75% or, even 50% of what you were receiving as pay out. The higher the percentage your spouse is guaranteed, the lower will the initial payments be.
Effect of Your Retirement Corpus Size on Your Annuity Choice
You can also note that the amount you have for your retirement corpus will have a say in your annuity choice.
For example, if you and your spouse need Rs. 50,000 per month (6 lakhs p.a.) as pension income post-retirement and have a retirement corpus of more than Rs. 2 crores, you can select ‘Joint Life Annuity with the return of Purchase Price’.
The interest from this corpus would be enough for you to withdraw Rs 6 lakhs a year (after 3% p.a. inflation) until the demise of the surviving spouse, without any effect on the original corpus.
However, if your corpus is lower than this, you should probably choose either the Joint Life annuity option or Life annuity with a return of purchase price. So, your spouse if surviving after you will either continue receiving the pension or have enough money to start a new one.
Single Life vs Joint Life Annuity – Summarising
There is no straightforward answer, and the decision depends on each person’s circumstances. It is certainly a tough decision to make, but the following pro tips could help:
a) Is your spouse totally/partially dependent on you for financial support? If yes, a joint annuity suits you.
b) Does your spouse work and/or have their own pension/annuity in place? Go for a single-life annuity then.
c) Are you willing to compromise and take away lesser pay outs so that your spouse gets cash flows when you will not be around? Joint annuities pay less because the annuity has to be paid for a longer duration.
To lead a financially independent, stress-free life in your 2nd innings, annuity plans are the best safety nets that give assured regular income to let you celebrate your golden years.