HDFC Life recently came out with an advertisement (see the image above) for its annuity product HDFC Life Pension Guaranteed Plan which projected rates of about 9.1% and 12.5% for deferred annuities of 5 and 10 years, respectively.
This actually results in a rate of 6.5% (known as Internal Rate of Return or IRR) assuming you live to be 100. The rate is even lower if you die before that age. Why?
Deferral means that you postpone taking the annuity from the company for the specified period of 5 or 10 years. This ‘postponement’ has an economic value which is captured by HDFC Life and reduces your overall return from the product. As a result, your actual return is much lower at about 6.5% – which is basically what you would get from an FD at present – with the added condition that you should live to be a 100.
What is an annuity?
An annuity is a payment of a fixed sum to you for the rest of your life in return for a lump sum payment from you. For example, you pay Rs 10 lakh to an insurance company and the company pays you Rs 80,000 per annum or 8% of your purchase price, for the rest of your life.
There are many types of annuities. The HDFC Life advertisement relates to an annuity which pays you an annual amount and returns your lump sum to your nominees on your death. However, the rates on these types of annuities tend to be quite low – around 5.85% to 6.32% in HDFC’s own tables. This probably prompted the marketing department of HDFC Life to promote a ‘deferred’ version of this annuity.
A deferred annuity version is a version in which you take nothing from the company for a fixed period. This is rather like giving HDFC Life an interest-free loan for a set period and hence lowers the actual return you get on the plan compared to the rate displayed on the policy advertisement.
How good are annuities?
If you have no dependents or heirs and have reached an advanced age, annuity rates can be quite attractive. These rates are typically offered on the ‘you get nothing if you die’ type of annuity. The annuity rate offered by HDFC Life here is 9.43% at the age of 70, 10.67% at the age of 75 and 12.30% at the age of 80. There is no deferral period for this type of annuity and the rate you see is the rate you get.
You can also compare the annuities offered by HDFC with other insurers such as LIC in its Jeevan Akshay VI Plans.
Are they taxable?
Yes, annuities are fully taxable and are taxed as per your applicable slab rate.
If you are looking for a fixed interest product for your retirement or income needs, there are a host of options available apart from the traditional bank and post office deposits.
- The Government of India 7.75% bonds will pay you an annual interest of 7.75% and return your principal amount on maturity. They are guaranteed by the government and hence carry very little risk.
- National Savings Certificates will pay you an interest rate of 7.6%. They are also guaranteed by the Government.
- If you are a senior citizen, you can get a higher rate of 8.5% in Senior Citizens’ Savings Scheme (SCSS) or 8% in Pradhan Mantri Vaya Vandana Yojana.
You can find out more about these products here.