Should you be Investing in an Annuity?

An annuity is one of the stipulated tax-saving tools that allow one to reduce his taxable income, and further the tax liability. However, lower returns, liquidity crunch, and tax disadvantages that come with annuity make it the worst investment alternative. Let’s ponder upon it in detail.

 What is Annuity?

An annuity is a long-term investment made in lump-sum, which gives the investor a regular monthly income. In India, only the Insurance companies provide annuity plans.

 Why should you not invest in Annuities?

Investing in annuities can be the worst decision of your life. Reasons are discussed below:

1.   Lower tax rate of return

The return on an annuity is lower than 8%.  A much better option would be locking your funds in fixed deposits where banks will offer you an impressive 9.5-10% interest return. The prime reasons for low returns in an annuity are:

–         The difference between short-term rates and long-term rates is ever increasing. Short-term rates are generally higher. Since the annuity is concerned with long-term investment, they cannot match the high short-term investment rates.

–         Annuities are drawn on the government bonds, which are though safe but yield low. Lack of availability of high yielding corporate bonds keeps this rate lower.

2.   Tax Disadvantage

A much more significant downside of annuities is the taxation disadvantage. The pension that you will receive after investing in an annuity is fully taxable in the same as an income is. Thus, the significant return on annuity after charging the tax comes out to be barely 5.25%. Itmakes investment in annuities uninviting.

3.   One way channel

Another considerable setback of investing in annuities is that this is a unilateral street- once in, never out. You cannot part away with the policy. You cannot withdraw the corpus that you invested therein. Hence, one must pour only a fraction of lives’ savings into an annuity.

What are some better-investing options?

Now the question arises – If not annuities, then where should you channelize savings? Here are some alternatives that one can consider in place of annuities of insurance companies.

•       The time-honored alternative of Fixed Deposit in banks could be your catch. They are safe, convenient, and widely available, and above all- highly liquid.
•       However, if you are not concerned about liquidity, you can pour your funds in SCSS (Senior Citizen’s Savings Scheme). Here, you can park funds up to Rs. 15 lakhs. This scheme is backed by the government and pays pensions every three months. Therefore, you can be sure of timely returns.

Since the interest incomes from bank FDs and SCSS are taxable, these alternatives are only suitable for lower-income brackets.

•       For high-end investors, investment in tax-free bonds of PSUs (Public Sector Units) will be an ideal option. The rate of returns in these tax-free bonds is above 8%. Also, it comes with minimal risks, as Public Sector Units issue them.