Have dependent family members? Buy return of purchase price annuity

Buy without return of purchase price plan if your retirement corpus is small

The Pension Fund Regulatory and Development Authority (PFRDA) has changed the rules regarding the purchase of annuity at the time of exiting the National Pension System. Earlier, investors had to put the entire corpus in one annuity. Now, if the corpus size exceeds Rs 10 lakh, they can buy multiple annuities of at least Rs 5 lakh each. Instead of buying a single annuity, they can now buy a bouquet of annuities to meet their varied needs.
 
Diversify among insurers

On retirement, 40 per cent of the NPS corpus must go into annuities. What is not clear is whether the subscriber needs to buy all the annuities at one go, or he can buy one annuity at the age of 60, and leave the balance with NPS. “If you can leave a part of the 40 per cent that has to be annuitised with NPS, then you can buy immediate annuities at regular intervals. But if all annuities must be purchased at one go, you could buy an immediate annuity with the first, say, Rs 10 lakh, and buy deferred annuities whose payouts start at five-year intervals,” says Deepesh Raghaw, Sebi-registered investment advisor (RIA) and founder, PersonalFinancePlan. This strategy will allow you to combat inflation. Returns from annuities improve with age.

Three-four annuities

Investors should limit the number of annuities to three or four. “If you buy too many, monitoring whether you have received the payout from each one will become a hassle,” says Arvind A Rao, certified financial planner and founder, Arvind Rao and Associates.

Go for joint life option

Joint life means first the buyer gets an annuity and after he has passed away his spouse gets an annuity (which could be 100 or 50 per cent). “Those who have financially dependent spouses must buy this option so that the latter don’t have to struggle financially in their absence,” says Sameep Singh, head of products-savings, Policybazaar.com. 
 
Purchase price: Two options   

RoPP means the principal is returned to the heirs after the buyer and his spouse have passed away. “If you pass away early after purchasing the plan, the principal comes back to the family, providing relief to them,” says Raghaw. The pension paid out is lower in these plans. Singh says this option allows the buyer to pass on wealth to the next generation.

In the without RoPP option, the principal is not returned to the buyer’s heirs. “But this option can provide a pension that is 20-30 per cent higher than the with-RoPP option,” says Singh.

Singh informs that the most popular option on his platform is joint life with RoPP.

Which one should you go for?

The choice should depend on the size of the retirement corpus, stage in life, and state of health.

“Subscribers without financial dependants may go for the without RoPP option and avail of a higher annuity for themselves and their spouse,” says Abhishek Kumar, Sebi-RIA and founder, SahajMoney.
 
According to Rao, those who don’t have a large retirement corpus should also not think of passing on a legacy and go for the without RoPP plan. By doing so, they will avoid being a burden on their children during their lifetimes. “If there are other assets to take care of the family, even then one can go for the without RoPP option,” he adds.

Raghaw says that at the age of 70, if your children are well settled and you are in good health, you may buy a without RoPP annuity. “At this age, the return from the without RoPP option becomes much higher than the with RoPP option, so you can meet your cash flow needs while locking in less money into an annuity,” he says. However, if the buyer’s health is not good buying this option would be foolhardy.   

Another point to remember is that the amount that goes into buying the annuity gets locked in. “In with-RoPP variant there is an exit route where by paying some penalty you can take out your money. In without-RoPP, there is no exit route,” says Raghaw.