Pension is generally defined as a regular payment made by the state to people who attained the age of retirement or at the time of death of an employee to the widow or to some disabled people.
Annuity is a long-term investment that is issued by an insurance company designed to help maintain a regular income to the individual or the family. This kind of regular income can be of various types as described in this article. The amounts payable also depends on the type of payment an individual chooses. However, in our regular conversations pension and annuity are used interchangeably conveying the same meaning. In this article also they are used interchangeably.
Pension can be a defined benefit or a defined contribution. Defined benefit is one where only the benefit is defined like 50% of the employee’s last drawn salary etc., where the corpus to support that kind of pension is made available by the employer. In Defined contribution method, an amount is deducted from the employee’s salary month on month and invested through a recognized fund. These amounts will get accumulated to form a corpus. At the end of the term like resignation, retirement or death of an employee, the amount accumulated will be transferred to a recognized (by government of India) pension authority from where he will get regular amounts. It can be monthly, quarterly, half-yearly or yearly pension.
In case of individuals, they can choose a pension plan which is normally sold by a life insurance company in India and keep on investing in that plan. Different life insurance companies offer products with different features. An individual can choose according to the requirement. The regular payments made to the customer by the company is termed as annuity.
In case of the pension products sold by life insurance companies, there are two types.
- Immediate Annuity
- Deferred Annuity
Immediate annuity plan is one where the customer invests a particular amount of money and keeps on getting annuity payments as per his choice like monthly, quarterly, half-yearly or yearly. The biggest advantage of this immediate annuity is that an individual can clearly know, without any uncertainty as to what is the amount he or she is going to get as per the options exercised by them. Most of these products offer the following options.
1.1 Pension as long as the person is alive with NO return of capital
1.2 Pension as long as the person is alive with return of capital
1.3 Pension with a guaranteed term of 5/10/15/20 and life thereafter
1.4 Pension for self, spouse and with return of capital
1.5 Pension for self, spouse
In case of option 1.1 above, the annuity payment is given to the person as long as the person is alive. in case of death no other payment will go to the family or nominee. Hence the rate of annuity payable in this option will generally be the highest. This option is exercised by an individual who has no one to nominate or who doesn’t want to pass on the corpus after the demise. However, the individual keeps on getting the highest rate of return as long as the individual lives even if it is beyond 100 years.
In option 1.2 above, an individual gets annuity till the time he is alive and after the demise of the individual, the nominee or legal heir will get back the full amount invested by the individual. For example, if a person has invested Rs.1 Crore at the age of 60 and he happens to die at the age of 110, he will get pre-defined pension till he is alive and after his death the total amount of Rs.1 Crore is returned to the nominee or legal heir.
In option 1.3 above, one can choose the guaranteed term of getting the annuity depending on his requirement in multiples of 5 years (normally) starting from 5 to 20 (maximum in most of the companies) and life thereafter. In case a person chooses 20 years guaranteed pay and life thereafter, he will get the annuity irrespective of the fact that he is alive or not. At the end of 20 years, if he is still alive, he will continue to get the annuity as long as he is alive otherwise it stops. The point to be noted here is that even if the person dies after say 11 years, the nominee will continue to get the annuity for the next 9 years. However, the annuity payable varies on the guaranteed term chosen by the individual customer. As the guaranteed term increases, the annuity payable will marginally decrease. Higher the guaranteed term, lower the annuity.
In option 1.4 above, an individual can get pension as long as he is alive and after his demise, his spouse can get as long as she is alive and after the demise of the spouse, the invested amount will be returned to the nominee or legal heir. In case the spouse happens to die before the policy holder, then also the invested amount will be returned to the nominee or legal heir. This is one of the best options. However, we find that the rate of return is lesser than that of option 1.1. Here also, the rate of return is fixed for entire term of payment and hence gives a guarantee of a certain amount of money during their lifetime.
In option 1.5 above, though it is similar to option 1.4, the invested amount will not be returned to the nominee or legal heir. In this case, the guaranteed return will be slightly higher than the option 1.4. When all the children are settled and there are no liabilities, one can opt for this option as this given higher return.
The following table explains all the options in a nutshell.
|
Options |
Pension Payable to the person invested as long as alive | On / after death of the person invested, Pension or ROC payable if |
Return of Capital invested |
|
|
Spouse is Alive |
Spouse is not Alive, payable to Nominee or Legal heir | |||
| Life long pension | YES | Not payable | Not payable to anyone | NO |
| Lifelong Pension with ROC | YES | YES. Return of Capital | YES. Return of Capital | YES |
| Guaranteed 5 years and life thereafter | YES | Yes. Till end of 5 years from DOC | Yes. Till end of 5 YEARS from DOC | NO |
| Guaranteed 10 years and life thereafter | YES | Yes. Till end of 10 years from DOC | Yes. Till end of 10 years from DOC | NO |
| Guaranteed 15 years and life thereafter | YES | Yes. Till end of 15 years from DOC | Yes. Till end of 15 years from DOC | NO |
| Guaranteed 20 years and life thereafter | YES | Yes. Till end of 20 years from DOC | Yes. Till end of 20 years from DOC | NO |
| Life long pension and 100% to spouse | YES | YES | NO | NO |
| Life long pension and 50% to spouse | YES 100% | 50% | NO | NO |
| Life long pension and 100% to spouse and ROC | YES 100% | YES | Return of Capital | YES |
ROC = Return of Capital
DOC = Date of Commencement of Policy
In India, there are a few schemes announced by Government which can give a better return compared to the annuity rates of Life insurance companies. However, the amount you can invest in those schemes is limited and the annuity that the individual gets is also limited for a particular period of time in most of the government plans. Given below are two such popular plans announced by Government of India.
1. Pradhan Mantri Vaya Vandana Yojana (PMVVY):
Pradhan Mantri Vaya Vandana Yojana (PMVVY) modified -2020 (LIC Table No. 856) is modified version of earlier PMVVY (Table No. 842) which was closed on 31-03-2020. The earlier plan has been modified and made available for three more years up to 31-03-2023. This plan is available for purchase from 26-05-2020 from LIC.
Key Features
- Policies purchased during financial year 2020-21 will get pension at the rate of 7.4% in monthly mode and 66% in yearly mode.
- The interest rate will be guaranteed for entire term of 10 years. Policyholder will get assured same rate for next 10 years which was fixed at the time of buying the
- In case of death of the policyholder before completion of 10 years term, invested amount will be returned to nominee.
- Interest rate for policies purchased beyond 2020-21 will be revised by Ministry of Finance on the beginning of each financial year.
Senior Citizens Savings Scheme (SCSS)
This scheme is also available to the people above 60 years of age. The amount deposited will have a fixed rate of interest for 5 years and can be renewed for another 3 years. However, the interest rate will be as per the prevailing rates at that time. The SCSS rate of interest for April to June 2020 has been set at 7.4%. Maximum amount that one can invest is Rs.15 Lakhs only. However, the amounts received under this scheme are taxable like annuity.
Need for Pension:
Regular Income:
Any person would like to have a regular income as long as he is alive. Planning for the same can make the person live a comfortable life all through. Otherwise, at a particular age, income stops as the person may not be able to work or carry on with his business due to both external and personal family reasons. At that time also, he will need a regular income to maintain his basic needs.
How Longevity affect your life and income:
Longevity of people is increasing every decade. If we look at the longevity in India, from the year 1900, it has been increasing and in 2015 it stands at 68.3 years.
Increase in Seniors:
Those who are in their 30s now will reach their 60s by 2050 and they live longer than those who are in their 60s now. Hence, if they want to live peacefully even after their retirement at the age of 50 or 60, they need to plan for a regular income now.For such people deferred annuity plans are suitable. They can invest for about 20 years or more and they can get a regular income on the basis of accumulated corpus and prevailing annuity rates at that time. During 1881, the average life expectancy of Indians was 25.44 years!! In 2019, as per our world in data website, it is 69.56 years. If someone is planning for retirement goal and his age is 30 years at present, and planning to retire at 50 years of age, then the life expectancy with 0.5% inflation would be 83 years when this guy turn 50 years of age. Whether you planned your retirement planning with 80 years or 90 years of life expectancy??
CONCLUSION
In both the government schemes shown above, the maturity period is limited. It is 5 years (extendable by another 3 years) in SCSS and 10 years in case of PMVVY. In case the interest rates go down, which is very likely in future, the senior citizens invested in these schemes have to suffer a lower return as the age increases. This will be a serious cause of concern for those who invest in these schemes. You will also find that there is no option to enroll spouse in these schemes. This means that in case the person dies, the amount will be given to the nominee or legal heir and if the legal heir is above 60 years of age, they can again invest in these schemes as per the interest rates prevailing at that time. However, the annuity schemes provided by life insurance companies have a fixed rate of interest as long as the person is alive and, in some options, even for the spouse. So, the same amount is assured for the rest of their lives even if it is a little less than the government schemes. In case a 60-year-old person invests in any of the above-mentioned government schemes, in the current trend of longevity which is likely to go up as per the indications shown in the following graphs, it will be a big disadvantage for that person. One can choose any scheme as per their requirement, however it is strongly suggested to go for an annuity scheme floated by a life insurance company. You can also compare the rates offered by different life insurance companies, as they differ from company to company and also the age of the person buying annuity. As a general formula, higher the age higher the rate of return.
