How to live comfortable, stress-free life after retirement

Deepak Mittal

The average life expectancy in India has increased by 3.5 years every decade over the past 30 years. This number is likely to go up to 300 million elderly by 2050 and will make up for 15 per cent of our population, as compared to 8 per cent today. Also, social attitudes post-retirement are changing, leading to increasing financial outlays.

Gone are the days when retiring meant a significant cut in lifestyle and expenses, and leading a ‘vaanprastha’ life. Today, after having led a grinding life, retirement is seen as a period to get back those lost moments. Another clear manifestation is in the quality of medical care being sought.

There is relatively low coverage of formal retirement solutions. While Central Government employees have reasonably good coverage in terms of pension schemes, private sector employees’ coverage is estimated to be as low as 8 per cent and coverage is non-existent in the informal sector.

Taking these concerns into consideration, it becomes absolutely essential that the Indian population begins planning well in advance to ensure a comfortable and stress-free future.

Retirement solutions

Typically, retirement solutions have two parts. One, an accumulation phase where one regularly saves into an investment avenue to create a corpus and two, a de-accumulation phase where this corpus is converted into a regular income source, post-retirement. In the accumulation phase, one looks at investment options, which allow for regular savings over the long term (up to the expected retirement age), and also provides balance across growth and safety considerations.

The National Pension System (NPS) and pension products provided by insurance companies, EPF and PPF are all accumulation products catering to retirement needs. Other wealth accumulation solutions like SIPs in mutual funds, ULIPs, recurring deposits by banks can also be considered in the accumulation phase, of which most do offer good tax incentives for participation. However, when it comes to the de-accumulation phase, there are very limited choices available. This is one of the key reasons for low penetration of retirement solutions. A good de-accumulation product for a retiree ideally covers the following:

• Regular pay-outs for life and not only for a defined period
• Income for dependent survivors (if applicable)
• Protection against inflation

Annuity plans

Annuity caters to these key dilemmas of a pensioner — a life-long pension at a steady, guaranteed rate. Annuities are the only solution that provide complete protection from the perspective of living longer (i.e. outliving one’s corpus) by providing a regular flow of income throughout one’s lifetime, purchased in lieu of a single lump-sum amount.

In its simplistic ‘avatar’, an annuity plan provides a lifetime guaranteed level pay-out, irrespective of how long one survives, and will not decrease even if the interest rate falls to any level. This means one not only locks in the current interest rate for one’s entire lifetime, but also eliminates the risk of exhausting the retirement corpus while one is still alive. There are many other annuity options that are designed to meet different customer needs. 

As the name suggests, it provides a guaranteed payout during one’s lifetime and returns the premium on death, intended for those who like to leave a legacy behind. Joint life is another option which is in demand and provides a guarantee that the pay-out would continue as long as either of the spouses is alive, hence giving a sense of surety that one’s spouse would get a steady stream of income throughout his/her lifetime even after one’s death.

Some other annuity options include increasing payouts at a pre-determined rate, usually 3 per cent or 5 per cent annually, providing some protection against inflation, as well as payouts for certain guaranteed periods, irrespective of whether the annuitant is alive or not.

The challenges

However, annuity also has its own share of challenges. There is insufficient visibility of the product for the last mile customer, coupled with the fact that annuities are taxed at the prevailing tax rate, thereby reducing the attractiveness of the payouts.

There are also challenges for the annuity providers having access to suitable long-duration assets to match the long-tailed liability, thereby limiting the ability to guarantee attractive returns. 

Hence, the government should come out with long-dated bonds for institutional investors. These have the added benefit of helping infrastructure projects by raising enough funds. Looking forward, it will be imperative that the government focuses on building awareness around the de-accumulation phase and rationalising the tax proposition vis-a-vis other instruments, including targeted tax relief on annuities.

Despite these challenges, annuity is still the best bet as far as the de-accumulation phase is considered, addressing the core need of a pensioner.

The writer is MD & CEO, Edelweiss Tokio Life Insurance. The views expressed in this article are his own