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BW Businessworld

If You’ve Missed The Bus...

The sheer ubiquity of LIC’s promotional material is astounding; unless you’ve been living under a rock in 2016, chances are you’ve spotted at least one advertisement of “Jeevan Akshay VI”, an annuity plan that they focused on heavily throughout the last year

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The sheer ubiquity of LIC’s promotional material is astounding; unless you’ve been living under a rock in 2016, chances are you’ve spotted at least one advertisement of “Jeevan Akshay VI”, an annuity plan that they focused on heavily throughout the last year. Perhaps; enamoured by their catchy slogan “Zindagi ke saath bhi, Zindagi ke baad bhi”, you considered dialling their toll-free number too.

Here’s the trouble: much to the vexation of thousands of would-be investors sitting on the side-lines, LIC shut down fresh inflows into the plan at the end of November 2016, citing unmanageably high inflows as the chief reason. Post the demonetisation-induced rate cuts across fixed income instruments, investors had flocked to the plan in hordes. It is estimated that Rs 2,355 crore flowed into it on the very last day!

Was this a case of rational investing or mass hysteria? A ‘post-mortem’ evaluation of the plan is warranted at this stage, to enable you to choose wisely if the next iteration of Jeevan Akshay is launched by the bellwether life insurer in 2017.

Annuity Basics
An annuity safeguards you from the risk of living too long, and running out of income thus. Jeevan Akshay VI was a single premium, immediate annuity plan which was being offered to individuals between the ages of 30 and 85; meaning that you’d write a cheque for a lump sum amount to LIC and begin receiving either monthly, quarterly, half yearly or annual pay outs immediately. The plan offered seven plans, each having distinctive annuity amounts per Rs 1 lakh (see table).

Crudely put, the annualised ‘returns’ earned from an annuity plan such as Jeevan Akshay are contingent upon your life span; the longer you live, the longer you’ll continue receiving cash flows — and hence the overall annualised ‘returns’ from the product will rise with each passing year. Upon evaluation, it turns out that if an investor survives to be 85, his pre-tax returns earned from Jeevan Akshay VI will lie somewherebetween 6.3 per cent and 7.4 per cent per annum depending upon the age subscribed to the product and the plan chosen.

The psychologically compelling “return of premium” option effectively ends up offering a lower rate of return despite the payback; and so is best avoided. Also worth noting, is the utter futility of annuitising your savings early on in life; a 30-year-old who annuitises Rs 1 lakh and survives to be 85 will be achieving an insignificant annualised return of 6.43 per cent per annum (before taxes) over a 55-year investment time horizon. That’s a violation of even the most basic tenets of financial planning.

Rubbing salt into the wounds of annuity investors is the fact that annuity returns are currently taxed as normal income, which implies that their in-hand annuity incomes will take a tax hit of 10-30 per cent, depending upon their marginal tax bracket. Besides, a service tax of 1.5 per cent is also applicable at the time of the annuity purchase.

Funds once annuitised cannot usually be encashed again; except in the most extraneous of circumstances. Jeevan Akshay VI, for instance, permitted encashment only for Plan 3, after at least one year, and in the event of the annuitant contracting a serious illness. Chances are; once you are annuitised, it’s for good.

Poor Inflation Insulation
For Jeevan Akshay VI, all options barring the 4th provided investors with a fixed rupee amount throughout the term of the annuity. With inflation nipping away at your heels, this is bound to drop your purchasing power drastically as the years roll by. For instance, the purchasing power of Rs 6,750 today will fall to the equivalent of just Rs 1,916 in 20 years, assuming a 6.5 per cent inflation rate. Also, worth noting is that the ineffectual Plan 4 started investors off with a much smaller annuity amount and grew it by a mere 3 per cent of the first year amount each year, providing little cushion against inflation in the process.

The Bottomline
Guaranteed returns and principal safety notwithstanding; the low returns, tax-inefficiency and illiquidity of Jeevan Akshay makes it a relatively unattractive proposition for retirees and middle aged income aspirants alike. It’s quite likely that the new iteration, if launched this year, will have an even lower inbuilt rate of return; given the fall in fixed income rates across the board. New features and clauses might be strapped on too. Read the fine print carefully before you jump in with both feet and end up firmly concretising your future income.

Bottom line: if Jeevan Akshay VII is launched in 2017, investors would be better off giving it a pass and opting for a well-diversified portfolio of stocks, bonds, and mutual funds instead.