The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "There are only two lasting bequests we can give our children... one is roots, the other wings." ~ Steven Covey

Why I don't like Annuity Plans?

Annuity is an investment that will give you 
a) a fixed amount of money 
b) periodically 
c) for the rest of your life.

It is this comfort of receiving income every month, month after month, for one's entire lifetime that attracts people towards annuity. You don't have to worry about whether your savings will last your lifetime or not. You are assured of receiving a fixed sum till the very end of your (or even your spouse's) life.

If you have invested in a Pension Plan, then you have to compulsorily buy an Annuity Plan at retirement, from the amount accumulated in your Pension Plan. However, if you don't have a Pension Plan, you have the option to even buy an Immediate Annuity Plan that will start your annuity payments without any waiting period.

However, beware!

While the concept of annuity sounds good, it comes with some serious drawbacks. And it is these drawbacks that makes me dislike annuities.

1. Once you buy an annuity, you lose access to your principal amount. If any need for lump sum money arises, annuity plan does not allow premature withdrawal. My contention - why have no flexibility to restructure my investments, if required, due to any change(s) in my financial circumstances.

2. The returns, once fixed at the time when you buy the plan, do not change throughout lifetime. My contention - why lose the opportunity to earn higher returns in case they move up in the future (sure it also exposes you to the risk of interest rates going down in the future).

3. A typical annuity plan pays 1-2% lower interest than a comparable product like bank FD, post-office deposit or debt mutual funds. My contention - why settle for a lower payout?

4. Besides, you have to pay tax on the income that you receive from an annuity plan. My contention - I could always look for more tax-efficient investments from time to time.

5. And of course, after a few years, this fixed inflow will mean nothing. Inflation would have made everything too expensive. My contention - I have to make investments that protect me against inflation too.

All in all, getting stuck - forever - with a plan which is rigid; and offers poor and tax-inefficient returns, doesn't appear to be a great idea... especially when you can do a much better job yourself without any serious efforts or requiring any serious financial knowledge.

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