I have to make a confession. The trigger for the posts come from questions/ posts sent to us by our valued readers. This particular post was written by us after we received a query from a reader regarding the advertisement given below:
The ad suggests that buying annuity is a very good decision. Let us find out.
From the text it may appear that somebody buying an annuity will be able to generate returns of around 12% in today’s market. Let us see examine the annuity returns from one of the plans being advertised by LIC: Jeevan Akshay VI.
Of the various options available, we will consider Option # 3 where the returns account for repayment of principal:
Below is what the small text of the plan says –
“Annuity for life with return of purchase price on death of the annuitant. The returns range from 6.43% to 6.92% depending on the age of entry. For a 60-year-old the return is 6.6%.”
Please note this annuity is taxable & will be added to your income. If you are in the highest tax bracket, then the tax-adjusted return would only be 4.6%. We will advise our readers to instead opt for debt funds and invite your attention to our write-up on fixed deposits v/s debt funds. The returns from debt funds after 3 years have very low tax & such funds give returns in excess of 7% (depending on the fund selected). We are happy to advise you on the fund selection process based on your risk profile.
Another big disadvantage of an annuity is that you cannot withdraw the money once you have invested in the product. In case you would like to withdraw your money due to any medical emergency or any other reason, you should be aware that you may not be able to touch the annuity. In our opinion, this is a very big negative.
One of the options available in the annuity plan is where the principal amount invested is not repaid on the death of the annuitant although the returns promised are also higher. For a 60-year-old the return is 8.9%. We will strongly urge our readers to not to even look at this option. Here the returns are higher as some amount of principal is being repaid every year. Here you will end up paying income tax even on the principal being repaid back.
The movie Umrao Jaaan was made in 1981. At that time there were not many investment options. Today a bouquet of financial products are available. If Muzaffar Ali were to remake Umrao Jaan today Rekha will be better off getting her money invested in mutual funds.Our advise to our readers is to be very careful in buying financial products.
Do watch Umrao Jaan it was a good movie. But do not fall for financial products being sold on that basis.
Happy investing!
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