2023-06-25 23:30:00
VNS Pillai
GodWhether it is a private pension plan or a life insurance company’s pension annuity, there are some things to keep in mind before getting a pension. On separation from service, the employee becomes eligible for government pension without making any contribution. Annuity is a paid-up pension. In our country, the duty of providing pension rests with the life insurance companies (other than the government) as pension comes under the definition of life insurance. That is why it has been said that when the member reaches the age of 60 in the National Pension Scheme, he should buy an annuity from any life insurance company using the funds.
After a long period of service, the fund created through the National Pension Scheme may be very large and the pension received through the life insurance companies may be more than the current pension (half of the salary) initially. The current pension and family pension will cease on the death of the pensioner and his wife or husband. But when life insurance companies provide pension annuity, if the pensioner chooses his annuity carefully, both the pensioner and the spouse will get the same pension and the funds used to pay the pension will be available to the heirs following their death. It is very important to choose the type of annuity when buying an annuity from life insurance companies through annuity policies, money purchase group pension schemes and lump sum annuity. For example let’s look at some of the annuity options available to a pensioner.
Annuity Options
Let’s see how these work. Suppose a person retired from service at the age of sixty invests his pension fund in an annuity for twenty years Life Annuity: In this the amount in annuity installments is relatively high. Each installment contains a component of principal and interest. All transactions terminate on the death of the pensioner. No one else receives principal, interest or annuity. A life annuity is only suitable for a person who has no dependents.
Annuity Certain
It is a guaranteed annuity for a fixed period of time. This guarantee is available for five, ten, fifteen or twenty years. If the person who has taken this 20 year option lives for thirty nine years then he will continue to receive pension annuity from the life insurance company for these 39 years. The annuity will also cease on his death. No one gets the investment. Suppose the pensioner dies three years following commencement of pension annuity. Annuity is drawn from the life insurance company to the heir nominated by the pensioner for the remaining seventeen years of the guarantee period. The deposit is non-refundable following the guarantee period. Because the investment is returned with each annuity instalment.
A rising annuity
Usually the annuity installments remain unchanged in amount. To solve this problem to some extent, the annuity is given an annual increase (eg 3 percent. There is a maximum limit to this). There are also joint life options where an annuity can be assured for the spouse as well. There are also options to provide 50 percent pension to the second (spouse) and the same pension.
Capital Returning Annuity
This is where the annuity is paid while the pensioner is still alive (however long) and then the investment is paid to the designated heir. When annuity is taken under this option, nomination is mandatory showing to whom the investment is to be returned. It is noteworthy that the posthumous heirs of the retired employee and spouse do not get a single rupee. Life insurance companies, on the other hand, perform a great social service by returning the deposits.
As the age at which the annuity starts increases, the amount in installments increases. An annuity starting at age 60 will yield more for the same investment than an annuity starting at age 50. Similarly, the annuity starting at the age of sixty-one will be more than this amount in each installment. Annuity installments need not be purchased monthly. Can be purchased quarterly, semi-annually or annually. The lower the frequency of annuity installments, the higher the installment amount. Annuity installments are calculated as per the prevailing rates on the date the annuity vests with the pensioner (the annuitant) even if the money is deposited into the annuity scheme. The higher the guarantees in an annuity, the lower the installments. It is also possible to commute a part of the annuity received with a fixed period of time.
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(The author is the author of ‘Pension&Annuity’ (Language Institute))
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