When NPS participants retire, they are required to invest 40% of their maturity corpus in an annuity that provides a lifetime pension. For many investors, this is the deciding factor that keeps some retail investors away from the NPS. That’s because annuity rates are low, and most individuals believe they can make higher returns by investing their money elsewhere. Investors are also sceptical about the fees that these annuity managing companies charge to manage your fund. Investors are also cognitively uneasy with the prospect of handing up control of a significant portion of their retirement money. Even those who agree to buy annuities choose for the ‘return of purchase price’ option, which returns the principal to the investor’s legal heirs upon death.
The anticipated launch of variable annuities may change that. The insurance regulator has approved variable annuity products, which will be offered by several annuity providers. These variable annuity plans shall employ complicated investment methods that utilize derivatives to deliver higher returns while mitigating the risk of investing in stocks. To begin with, variable annuity products are expected to focus on basic alternatives with equity-linked returns. These returns can be benchmarked against a variety of indexes, including the Nifty and Sensex, as well as individual equity funds provided by insurers. With these variable annuity schemes, 60-80% of the purchase price will be employed in fixed income instruments, with an assured minimum payout. The remaining 20-40% of the fund would be invested in stocks and equity-linked products to generate better returns. Hence customers shall have the option of allocating a certain amount of their investments in equity as well.
The regulator has requested that insurers specifically indicate the fluctuation in annuity payouts in respect to the benchmark in their filing forms. They are also expected to give representations of annuity rate variations and related risks to assist clients in making an educated decision.
Yet, variable annuities that invest in equity are a two-edged sword. If equities markets do not perform well, the anticipated large return may not materialize. The retiree’s pension will be lower than what a fixed annuity currently provides. So, investors should exercise caution while selecting these variable annuity plans, bearing in mind their risk appetite, as most of the beneficiaries will be in their golden years, and their risk-taking capacity will undoubtedly be quite low at that age.
