Annuities are simple products. You pay a lump sum amount to the insurance company and the insurance company guarantees you an income stream for life. These plans have a few variants too. You can go with or without the return of the purchase price. You can choose where your spouse continues to receive the pension after you. You can select immediate annuity or deferred annuity variants. Under immediate annuity plans, the pension starts right away. Under the deferred annuity variant, the pension starts after a few years.
Structurally, annuity plans have their merits and demerits. And this applies to all the annuity products. The greatest merit is that annuities help you cover longevity risk. You will never run out of money with annuities even though inflation can drastically reduce the purchasing power of the income stream over the years. I have discussed the pros and cons of annuity products in this post. Additionally, with annuity plans, your pension increases with entry age. Therefore, you need to purchase the annuity product at the right time too. Annuity plans, if used smartly, can deliver great value to retirement portfolios of many investors.
An interesting part with annuities is that you know upfront what you are getting into. You pay X amount upfront and you get Y amount per month for life. Very objective. No variables involved. And this makes it quite easy to compare various annuity products. As an investor, you must go with the product that gives you the highest pension. Doesn’t get simpler than that, does it?
HDFC Life Pension Guaranteed Plan: Salient Features
HDFC Life Pension Guaranteed Plan is no different from any other annuity plan. It is a single premium plan. Based on your age at the time of purchase and the variants, the insurance company provides you a guaranteed income stream for life. Your pension can start immediately (immediate annuity) or it can start after a few years (deferred annuity). The plan is available in both single life and joint life variants. I have nothing against HDFC Life Pension Guarantee plan either.
At the same time, given the purpose an annuity plan is expected to serve, the intent should be to purchase the best plan.
Since it is easy to compare annuity products, when one of my clients asked my opinion about the HDFC Life Pension Guaranteed Plan, my first reaction was to compare the annuity rate with LIC Jeevan Shanti, an annuity product from LIC. After all, the comparison is incomplete if I don’t pick a LIC product for comparison. I have discussed LIC Jeevan Shanti in great detail in this post.
HDFC Life Pension Guaranteed Plan Vs. LIC Jeevan Shanti
Let’s look at the annuity rates for various entry ages and variants under HDFC Life Pension Guaranteed Plan and LIC Jeevan Shanti.
I have considered the purchase amount of Rs 10 lacs. With GST of 1.8% for the annuity plans, the total premium comes out to Rs 10,18,000. Let’s see how the two annuity plans fare for different entry ages and variants. I have limited the comparison to those ages and premium variants that were available on HDFC Life and LIC websites. I have compared the annuity rates for the single life variant.
As we can see, LIC Jeevan Shanti is providing better annuity income in almost all the scenarios. The only time HDFC pension plan does better is when the entry age is 50 and the variant is “with the return of purchase price”. I cannot explain why the annuity rate for the HDFC plan should be high at that age of 50 (annuity rates typically increase with age). This could be a business decision too. After all, many investors start thinking about retirement income around that age. When such an investor compares the rates, HDFC plan will win. In any case, it is good from your point of view. You get a fine rate at a lower age too.
Therefore, if you are planning to purchase an annuity plan, LIC Jeevan Shanti is likely a better option. However, you must compare the rates for your age and the variant you like and decide accordingly. It is possible that the HDFC Life Pension Plan provides you a better rate. By the way, I assume buying an annuity plan makes sense for your finances. Moreover, LIC Jeevan Shanti and HDFC Life Pension Guaranteed Plan are not the only plans. You can consider annuity plans from other insurers too before you decide. The one that gives you the best annuity rate is the right one for you.
A point to note if you are planning to go with the deferred annuity variant. Don’t fall for the flawed pitch. Get your numbers right.