AnnuityMandar Learning Academy Pvt Ltdwww.mandarfin.comAuthorized education provider ofFPSB-India : AnnuityMandar Learning Academy Pvt Ltdwww.mandarfin.comAuthorized education provider ofFPSB-India
Learning Objectives : 2 Learning Objectives What is annuity?
Types of annuity
Immediate annuity and annuity due
Advantages & disadvantages
Some annuity policies
Taxation www.mandarfin.com
Annuity : 3 Annuity Payment at a regular interval
Systematic liquidation of an asset
Accumulation period – Premiums paid to purchase annuity
Distribution period – Annuity payments are made. www.mandarfin.com Some Terms
Annuitant
Beneficiary
Annuity : 4 Annuity It’s a kind of “Transfer of risk”
- Investment Risk (Change in interest rate will not affect the payment already contracted)
- Longevity Risk (Company issuing annuity takes the risk of payment of annuity till death)
Sold by life insurance companies www.mandarfin.com
Annuity v/s Life Insurance Policy : 5 Annuity v/s Life Insurance Policy Life insurance pays out cash benefits to the family after the death of insured.
Annuities start paying an income at or after retirement.
The annuity will continue paying an income while one is alive or in case of joint annuity, joint holder is alive www.mandarfin.com
Annuity : 6 Annuity Can be bought by paying
- Single Premium
- Regular Premium www.mandarfin.com
Types of Annuity : 7 Types of Annuity www.mandarfin.com
Types of Annuity : 8 Types of Annuity Payment basis:-
Immediate Annuity
Deferred Annuity www.mandarfin.com
Types of Annuity : 9 Types of Annuity Amount basis:-
Fixed Rate Annuity
Equity indexed annuity
Variable Annuity
Increasing Annuity www.mandarfin.com
Types of Annuity : 10 Types of Annuity Payment Terms basis:-
Single life annuity
Life annuity
Annuity Certain
Annuity with return of purchase price
Joint life annuity
Annuity Certain
Joint Life Annuity without return of purchase price
Joint Life Annuity with return of purchase price www.mandarfin.com
Ordinary annuity and Annuity due : 11 Ordinary annuity and Annuity due Ordinary annuity – Payments are made at the END of the period
Annuity Due – Payments are made at the BEGINNING of the period
Annuity Due X ( 1+r) = Ordinary Annuity www.mandarfin.com
How are annuity payments calculated ? : 12 How are annuity payments calculated ? It is based on a complex calculations that takes into account
Original purchase price
Age
Joint annuitant’s age
Life expectancy
Benefit payable
Annuity rates at the time of purchase
Frequency of payment www.mandarfin.com
An example of annuity payments : 13 An example of annuity payments www.mandarfin.com
When is the use of annuity required : 14 When is the use of annuity required When a person wants a retirement income that cannot be outlived.
When an individual wants a retirement income higher than their other conservative investments and is willing to have principal liquidated.
To avoid probate and pass a large sum of money by contract to an heir and reduce the possibility of a will contest.
When an investor wants to be free of the responsibility of investing and managing assets www.mandarfin.com
Advantages : 15 Advantages Guarantees of safety, interest rates and lifelong income
Protects and preserves person’s cash reserves
Allows investment in the market while moderating risk
Client can “time” the receipt of income and shift it into lower tax bracket years
Annuity paying the same rate of interest as a taxable investment will result in a higher effective yield
Variable annuities – client may take on greater risk in the underlying investment options (equities, small market capitalizations, high yield bonds etc.) while still maintaining a reasonable risk exposure due to the underlying guarantees www.mandarfin.com
Disadvantages : 16 Disadvantages Receipt of lump sum could result in significant tax burden
Income averaging may not be available
Cash flow received may not keep pace with inflation www.mandarfin.com
Some Conditions : 17 Some Conditions No surrender permitted under the annuity plan
No loans are allowed under annuity policy. www.mandarfin.com
Taxation : 18 Taxation Most pension or annuity policy offers tax benefit u/s 80CCC for the premium paid.
During deferment period – No Tax liability on accumulation. www.mandarfin.com
Taxation : 19 Taxation Received from present employer - taxable as salary
Received from ex-employer - taxable as profit in lieu of salary u/s 17(3)(ii)
Received from other than employer (insurance policy/ other contact/under terms of deed) - taxable as income from other sources.
1/3rd Commutation of annuity is tax free. www.mandarfin.com
Some annuity policies : 20 Some annuity policies Jeevan Akshay V (immediate annuity)
New Jeevan Dhara – I (deferred annuity)
Jeevan Nidhi (deferred annuity – pension plan) www.mandarfin.com
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