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If you are considering investing in an insurance pension product that provides annuities when you retire, for a steady flow of income during your golden years, you need to hurry. This is because annuity rates offered by insurers are likely to come down shortly in line with the downward movement on interest rates. Some insurers have already dropped rates and others may follow soon. There is a small window available with some insurers; if you apply now, you will be eligible for income on currently prevailing rates. Initiating this online, will set the process in faster so that you don’t miss the opportunity.
Annuities are a products offered by insurers in which accumulated corpus is invested to provide steady periodic payouts to the insured. This provides income security at old age. Thus, investments made in pension products that offer annuities accumulate to create a corpus at the time of retirement. This corpus, or a portion of it, is invested in annuities to provide monthly payment to the insured.
These annuity products come with various options – they can offer lifetime payments, lifetime payments with refund of capital, payment on monthly, quarterly, half yearly or yearly basis, lifetime income with the income rising by 3 or 5% after a certain period and so on. You can also opt for annuities on two lives. “Interest rates in India have dropped over the last couple of years. Inflation target at 4 per cent indicates a further lowering of interest rates for some time in the future. Since insurance companies pay annuity based on the income they generate on investments, they may be forced to reduce annuity rates,” says Anil Rego, founder and CEO, Right Horizons told FeMoney.
The current annuity rates range between 6.3-6.7 per cent. There would be variation depending on the age of entry and rate offered by the insurance company, Rego said.
Ankur Agrawal, Category Head, Life Insurance and Personal Loans, BankBazaar.com agrees with Rego. “Annuity rates are likely to come down soon. For insurance companies, these are a long-term commitment and the rate of return in these instruments are coming down. But it is difficult to confirm by what percentage this will happen. The extent of reduction will depend on factors such macro indicators, long-term bond rates, etc,” Agrawal said. Both Rego and Agrawal advise investors wanting to invest in annuity products to lock in their investment at this point to get a higher contracted rate for annuity payments.
“Those wanting to buy pension products with annuity payments need to lock in some portion of their surplus at the current rate with return of purchase price option. The customer should compare the rates from various companies before making an investment decision,” Agrawal said.
Rego concurs. “It is expected that interest rates will drop for the next few years. If that were to occur, locking in a rate now is a good idea,” he said.