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Annuity Plans Offer Many Options For Retirement Pension

I have repeatedly advocated against investing in Pension Schemes (See 'Thou shall NOT BUY Pension Plans' and 'Nine serious limitations in NPS') and Annuity Plans (See 'Why I don't like Annuity Plans?').

However, many among you are already saddled with Pension Plans. Consequently, you will have to compulsorily buy an Annuity Plan upon retirement when the Pension Policy matures. If your policy offers you a chance to quit midway, do sincerely explore such an opportunity and get rid of such oppressive schemes.

If not, a typical Annuity Plan offers many alternatives depending on how you propose to draw your monthly pension.

Option 1: Annuity for life
A fixed amount of annuity would be paid for your entire lifetime. Upon death the annuity will stop. There is NO RETURN of the corpus invested. Among various options, this offers the maximum payout per month. If you have no dependents then this option can be considered.

Option 2: Annuity guaranteed for 5, 10, 15 or 20 years and life thereafter
Annuity is payable for the guaranteed period you opt. If death happens during this guaranteed period, the nominee continues to receive annuity till this period is over. However, if you survive the guaranteed period, annuity continues till your lifetime. Upon death annuity payment stops. Again, there is NO RETURN of the corpus. This option can be considered if you need to support your dependents till a certain period.

Option 3: Annuity for life with return of corpus
As is quite obvious, herein a fixed amount of annuity would be paid for your entire lifetime and upon death the corpus would be returned to your nominee. This option is for those who wish to leave something for their heirs. However, this option pays the minimum monthly annuity, as the insurance company has to return the entire corpus.

Option 4: Annuity payable for life increasing at a simple rate
Receiving a fixed amount month after month for many years is not advisable as day-by-day things become expensive due to inflation. Therefore, some increase in amount year after year is desirable. Of course, the rate of increase is generally around 3-5%, whereas inflation in India has been quite high. So this provides only a marginal relief. Still, something is better than nothing. But remember, as in Option 3, herein too the monthly payout will be lower than Option 1 and 2.

Option 5: Annuity for life with a provision of 50% / 100% of the annuity payable to spouse
You get annuity till your lifetime. Thereafter, 50% or 100% of the annuity payment continues till the lifetime of the spouse. After that the annuity will stop. There is NO RETURN of the corpus invested. If the spouse predeceases you, the annuity will be paid till your lifetime.

Option 6: Annuity for life with a provision of 100% of the annuity payable to spouse and then return of corpus
You get annuity till your lifetime. Thereafter, 100% of the annuity payment continues till the lifetime of the spouse. After that the annuity stops and the corpus invested is returned to the nominee. If the spouse predeceases you, the annuity will be paid till your lifetime and corpus returned to the nominee thereafter.

So, depending on your specific circumstances, you have considerable flexibility to choose the most appropriate option to receive your monthly pension.

Naturally, the amount that you can expect to receive every month would vary depending on the option that you choose.

I guess it would be better to know the specific amounts so as to get a better understanding of the whole concept.

Let's assume that a 60-year person retires today. He receives Rs.10 lakhs from his Pension Policy with which he is supposed to buy an Annuity Plan. 

Then, as per the interest rate scenario currently prevailing, he can expect to receive following amounts as pension every month.

Option 1: Annuity for life
Rs.7500 - Rs.7800

Option 2: Annuity guaranteed for 5, 10, 15 or 20 years and life thereafter
Rs.7000 - Rs.7300 (for a 15-yr guaranteed term)

Option 3: Annuity for life with return of corpus
Rs.5600 - Rs.5900
(This is similar to your say bank FD, and hence better for comparison with non-Annuity investments.)

Option 4: Annuity payable for life increasing at a simple rate
Rs.6000 - Rs.6300 (at 3% increase every year)

Option 5: Annuity for life with a provision of 50% / 100% of the annuity payable to spouse
Rs.6500 - Rs.7200

Option 6: Annuity for life with a provision of 100% of the annuity payable to spouse and then return of corpus
Rs.5600 - Rs.5800

As you will observe, you will receive lower monthly payout if you wish that the initial corpus comes back to your nominees or the pension extends till your spouse's lifetime. In other words, it is a clear cut trade-off between 
(a) nil money at the end, which means more money every month and 
(b) return of corpus / longer expected annuity tenure, which means less money every month.

So, pick whatever is the most appropriate alternative for you.

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