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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Many Disadvantages Of Buying Annuity Plans

People often fear that their savings may not last their lifetime.

In such a scenario, an Annuity Plan — that guarantees safe and secured return for the entire life — undoubtedly appears to be a great investment. You can sleep peacefully, knowing that you will never run out of money.

Unfortunately, however, this peace comes at a great expense, great inconvenience... and a great risk!

So much so that it may be prudent to rather forgo this peace than pay a high price and expose yourself to high risk and inconvenience.

Let's understand the many (many) problems with a typical Annuity Plan.

1. Liquidity Lost
Once you buy an annuity, you lose access to your principal amount forever.

Depending on the type of annuity plan you choose, there would either be no return of principal amount; or your nominee will be returned the principal amount after your death.

In case, in the interim you need any lump sum amount say for a critical illness or your child's education, Annuity Plan would fail to help you. It will give no money whatsoever to meet your important requirements.

This is indeed a serious inconvenience.

2. Flexibility Lost
As a corollary to the above, you have no option to prematurely withdraw your investment in an Annuity Plan.

Hence you have no flexibility to restructure your investment, if required, due to any change(s) in your financial circumstances. Maybe you have settled abroad and would like to shift all your investments out of India. Again, Annuity Plan will allow no such restructuring.

Again a serious inconvenience indeed.

3. Returns Unchanging
The returns are fixed at the time of buying the plan. For the next 20-30 years you will get the same rate of interest.

Therefore, you will not get the benefit of any increase in the interest rates thereafter. (Of course, you are also protected against the risk of falling interest rates.)

If the rates are at historically high levels, maybe its fine if the returns are fixed forever.

But, if the interest rates are low (as at present), this is a serious issue.

You will NEVER ENJOY this comfort with Annuity Plans!

4. Returns Not Competitive
Interest rates on Annuity Plans are relatively much lower, compared to other fixed income instruments.

Take the simple case of a bank fixed deposit. And compare its interest rate with an Annuity Plan, where there is return of principal upon your death. You will find that the Annuity Plans offer 1-2% lower rate of interest.

Earning lesser returns year after year for decades. is most definitely a serious issue.

5. Tax Inefficient
Even these little returns that you get from an Annuity Plan are taxable.

Whereas, if you had access to your capital, you could choose the more tax-efficient options available from time from time. For example, you could have invested in PPF; you could have bought Tax-Free bonds; or invested in the tax-efficient debt mutual funds.

Once you are locked in an Annuity plan, you will perforce have to keep paying more tax.

This for a retired person, dependent on the pension from an Annuity Plan, is indeed the most serious issue.

6. Capital Dead
In an Annuity Plan, the capital does not grow. It remains the same... forever.

Whereas inflation is making things expensive day-by-day. As such, after a few years, you will find that you won't be able to meet your day-to-day needs with the fixed pension from a fixed capital.

It is important for capital to grow. This is only possible when you have access to your capital and can reinvest it in investments that can beat the inflation.

Dead capital is another serious issue with the Annuity Plans.

Concluding: An annuity plan will typically run for 20-25 years (assuming you retire at 60 and live upto 80-85). Hence, it makes no sense to lose complete control over your money.

Why earn lower returns?
Why pay more taxes?
Why have no flexibility?
Why kill your capital?

A little bit of financial knowledge will:
(a) not only help you manage your money more efficiently than an Annuity,
(b) but also ensure that your savings outlive you and you leave a sizeable legacy for your children.

In short, don't buy Annuity Plans... NEVER.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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