Category Archives: Retirement Planning

Buy Right Annuity, Retire Rich

Annuity plans available to help you choose the right option that fits your needs best and ensures a happy retired life:

When Rahul Dravid called time on his legendary career last week, it served as a poignant reminder of the inevitability of what is a dreaded word for many — retirement. Indeed, the growing life expectancy in the country poses a challenge — of managing the risk of living long, particularly in a society that is increasingly moving away from the financially secure confines of the joint family system.

However, coming-to-terms can be relatively easy when you have planned for it meticulously during your earning years. In fact, a well-charted retirement process can even act as a springboard for a brighter future, besides ensuring peace of mind. All you need to do is to save and invest wisely to build a handy sunset-years kitty. Be it creating a corpus through equity, mutual funds and fixed deposits or buying a pension plan. In case of the latter, you will have to undertake the vital task of buying annuities, when the accumulated amount is handed over to you.

Annuity-buying process gains significance particularly in light of new Irda guidelines on pension plans which have heralded several changes. Under the new regime, among other things, policyholders will not have the choice of approaching the insurer which offers the best annuity rates at the time of vesting. This has been done to reduce the burden on PSU behemoth LIC, which rules the space at present.

This makes it imperative for them to choose wisely while buying a pension plan itself, factoring in the insurer’s capabilities. “A full provider evaluation does become an important factor to be considered upfront when buying a pension plan. In addition, track record in managing the corpus, charges and fees, transaction convenience, payout history, etc, become important to evaluate,” says Vishal Kapoor, head of wealth management, Standard Chartered Bank. While rates are important, your decision cannot be based solely on the ones being offered at present. “Do note that the annuity rate at the time of buying a pension plan need not be an indicator of what you would get when you need to buy annuities in future,” cautions Sanjeev Pujari, appointed actuary, SBI Life. So far, nearly 21 products have been filed with the insurance regulator for approval since the new norms became effective from January 1, 2012. Last week saw the launch of MetLife’sdeferred annuity, or pension, plan. Also, SBI Life launched an immediate annuity scheme.

Annuities refer to the stream of income an insurer pays at regular intervals until your death or the end of tenure you may have opted for. The corpus at the end of the accumulation phase will be paid out in two parts — 1/3rd in the form of lumpsum, with the remaining being converted into annuities. Now, you need to ‘buy’ annuities using the amount accumulated by your pension plan or any cash lump-sum. And the annuity option you choose would depend on your requirements and expectations from the plans. This would be applicable primarily to those who may have built the corpus through pension plans until January this year and others with a fund pool. As mentioned earlier, those buying pension plans henceforth will have to settle for the annuities offered by their insurer. Within the basket of annuity plans offered by your insurer, though, you still have to use your discretion. This would be applicable to everyone looking to buy annuities — irrespective of the date of purchase.

“While zeroing in on the right option, you need to ponder upon three questions — what kind of income you would require, whether your annuity requirement would go up or remain the same throughout your life-time and whether you would like to redirect the proceeds to your spouse upon your death,” says Pujari of SBI Life. Adds Kapoor of StanChart: “Customers should look at the expected rate of return (annuity rate) net of charges, the period of annuity desired (whether for life, or for a fixed period), flexibility in joint ownership and payout while buying annuities.”

After an evaluation of your requirements, you can get down to the business of choosing an annuity option that fits your need best. Broadly, annuity plans are categorised into five segments although the range of options could vary as per the insurer.

ANNUITY PAYABLE FOR LIFE: The annuitant is paid a fixed annuity at regular intervals throughout his life. The insurer stops paying pension after the annuitant’s death. This is suitable for those who do not have any obligation post death. This option offers the highest amount of pension for an individual compared to any other options available.

ANNUITY PAYABLE FOR LIFE WITH A GUARANTEED PERIOD: Here, annuity is paid for certain number years, (say the chosen term of 10 years) and thereafter as long as the annuitant is alive. Shorter the guarantee period, higher is the pension. Annuity stops upon either the death of the annuitant or completion of the guaranteed period, whichever is later. This is a simpler tool to ensure income for the family for a stipulated period of time. For example, say the annuitant retires at a time when s/he is still the sole earning member in the family, but expects the kids to take over after five years; such individuals can look at annuity that is guaranteed for five years.

This option could work for those who want to leave alegacy for their nominees to inherit. Here, the annuitant enjoys the pension till s/he dies. After the death of the annuitant, the purchase price of the annuity (that is, the premium paid by the buyer of the annuity) is handed over to the nominee. This is a popular option as both the annuitant and the nominee stand benefited. Some new variants also offer to get the purchase price back in parts.

LIFE ANNUITY INCREASING AT A FIXED RATE: Under this option, there is an increase in the annuity amount payable per year at a certain rate, say of 3-5%. “While it is not linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to an extent,” says Pujari.

JOINT LIFE AND LAST SURVIVOR ANNUITY: As the name denotes, annuitant is entitled to receive the pension throughout his lifetime. If the spouse survives the annuitant, the former is also entitled for the pension, ensuring ‘life-style maintenance’ of the spouse. The buyer can further choose the quantum of pension (50% or 100% of the annuity payable to annuitant) payable to the spouse.

The advantages notwithstanding, you would do well to refrain from putting all your eggs in the annuity nest. “Annuity income is taxable. Therefore, while buying one, you should ensure that your annual income from annuity is within the ‘no-tax’ limits,” says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters. Besides, you can also consider other tax-efficient avenues such as shortterm debt mutual funds or tax-free bonds. “Annuity income is fixed, and if the interest rates move up, you may not get to participate in it. That makes it all the more important to ensure that you portfolio gets some exposure to instruments that are liquid,” adds Navlakhi. In other words, you would be in a secure position if you have allocated your savings amongst a mix of products that complement each other. Remember, while retirement is seldom thought to spell happiness, a carefully planned one will ensure you close your professional innings with your head held high.


Truth, Integrity Should Be the Hallmarks of Financial Planners

Truth and integrity are words we hear a lot, but hardly find in real life. Politicians talk a lot about it and almost have nothing to show for it. Their oath of allegiance when they assume office is hollow, as politics today is a game of private enrichment at public cost. 

It is surprising that people have this conviction that integrity and truthfulness do not have a place in the present-day world. In fact, integrity does have a place in today’s world and those who are practising it know it and are doing extremely well. There are many who practise the highest levels of integrity in their personal lives and in their corporate avatars.
Infosys, Wipro, Tatas, Godrej, and the TVS group are some of the wellknown companies/groups, which come to mind when we are on the subject of integrity. For some of them, it is their calling card. For Tatas, apart from their management acumen, they are sought after by any company looking for an India entry, due to their impeccable credentials.
Integrity can be an actual differentiator. In the finance field, which deals with people’s money, it is even more important. The field has received a severe battering in the past three years and the integrity of this industry is in tatters. To this day, we read stories of deceit and wanton misleading of various participants.
Integrity is at the heart of building longstanding relationships. Integrity is difficult to maintain at all points. It is easier to bend the rules a bit, to suit one’s convenience. But that would bring down the moral stature a person has and their allweather dependability. Trust is built over time. One wrong move and their integrity is compromised.
Trust is a word that is often used by many in business. It is used even more in the world of finance — to allow another person to handle your money and with it your future requires quite a leap of faith. Hence, trust and integrity have even more relevance in the financial space.
Come to think of it, this can be one’s calling card. It will be an effective one at that. Each one of us operating anyway require something to distinguish us from the rest. Why not integrity? Why not actually take the moral high ground and stay there, where the clients like us to be?
Think of this as a long-term strategy. An insurance agent might lose some potential income by foregoing on the opportunity to push a product with juicy commissions — especially to a client who anyway does not know much about insurance. That is where integrity comes in. Integrity is what you do when no one is looking. What does the agent gain by doing the right thing? On an immediate basis, nothing. But the agent can always communicate to the clients all the options available to them and educate the client why, from among the various options, he is suggesting a particular product. This willingness to spend time to engage and do the right thing will certainly be appreciated and remembered. These are the agents who will go on to become the star agents of the branch, region, company, because a happy client recommending the agent to 10 others.
It works. Not just in insurance. It will work everywhere. It is even more fundamental in the financial planning profession, where I come from. Integrity is the backbone of this profession. Financial planners get to handle complete client information, unlike any other who may only get to see bits and pieces. Hence, integrity needs to be of the highest order here — not just beyond reproach. Trust is the currency here. And trust needs to be earned.
Earning trust is a relentless, dogmatic pursuit. Talking the truth all the time is immensely tough. But it needs to be done, because that is the highroad that one needs to take if success of the highest order needs to be achieved.
Quite simply, it is in our own self interest – enlightened self-interest. Doctors take the Hippocratic Oath to always act in their patients’ interest. A similar oath is what we all require. Both professions have a fiduciary responsibility. Done right, finance is as much a noble profession as medicine is – for one treats the body and the other takes care of the other most important part – money.
We all need to think about it. Each of us has to attest to the highest standards of honesty, integrity and truthfulness. This is not some utopia that I’m talking about. It’s what regulators are trying to create. It is what we can create ourselves and reap the benefits, too. And be counted as some of the best professionals there are. The choice is ours.

Seven Things You Should Look for in a Financial Planner

Recently, a new breed of professionals has emerged who are making financial plans for everyone and are not restricting themselves to investment planning. A financial plan includes planning for your taxes, retirement, kids’ education and marriage, buying a home, estate planning or any other goals you may have. 

This new breed of professionals, known as financial planners, writes a plan for you with all your goals specifically laid down and then provides you with a road map on how to achieve these goals. They always give you a holistic account of all your finances, taking into account all your assets and liabilities, besides taking care of all the risks associated with you and your family and also the assets owned by you. These financial planners will first collect all the data related to your finances and the goals you have for future. These goals may be anything ranging from buying a home, to planning for your child’s education to going on a vacation. After this exercise of data collection, the financial planner will analyse your goals and accordingly write a financial plan for you.
This financial plan will carry recommendations you need to follow as they will help you achieve all the goals. These financial planners may charge professional fees for making this plan for you. You will find various planners who can do this job for you.
But how to choose a financial planner who can handle your finances in the best possible way for you? Below are seven pointers you can keep in mind while scouting for a professional who can write a complete financial plan for you.
1. The planner should start by collecting data relating to your finances, analyse your goals and then recommend through a written financial plan and not just recommend a plan to you without understanding either your finances or your goals. Your financial planner should provide you with a holistic picture of your personal finances and provide you with a road map for your finances rather than just trying to sell you products.
2. Ideally, you should always go for a ‘fee only’ financial planner. This will ensure that the planner doesn’t have any interest in selling any particular product along with the plan. Along with that, this will also make sure that the recommendations provided to you in the plan are completely unbiased and to your benefit. A fee-only financial planner will disclose his fees upfront.
3. The financial planner should analyse all your goals and take a holistic picture of your finances. Once the analysis is done, he should draw out an asset-allocation plan for your goals. All the product recommendations should follow the asset allocation suggested. The financial plan may or may not carry any product recommendation. In case the plan is carrying product recommendations, then be sure that you have an option of buying the product from any other broker or distributor.
4. The financial planner should be well qualified to take care of all the decisions concerning your money. You must verify if your planner holds professional degrees like a certified financial planner (CFP) qualification or chartered accountancy and has specialised in financial planning. Both knowledge and qualifications will build up your confidence in the financial planner and will assure you of good management of your money.
5. If your financial planner is suggesting you to buy products like a traditional insurance policy, then be sure that he is just trying to make money for himself through commissions for himself or some of his associates. Stay away from a financial planner who suggests you to buy such dead products, which cannot be justifiably recommended by any financial planner.
6. Do some research on your planner and his reputation in the market. You can go on Google and search for his/her name. A financial planner with good reputation will always be very popular with the media and you will find enough to read about them over the Internet.
7. Stay away from a financial planner who starts off with advising you a product without analysing all your goals.
Most importantly, go with your gut feeling after the first meeting.