The Kulkarnis' ₹68 lakh and a '25% higher' deferred annuity
Ravindra and Shalini Kulkarni are both 61, in good health, and have just retired from salaried jobs with no employer pension. Their entire retirement savings are ₹68 lakh: ₹45 lakh in fixed deposits earning 7.1%, and ₹23 lakh in an equity mutual fund. Their flat is paid for, their monthly household need is ₹38,000, and they want to keep at least ₹8 lakh accessible for medical emergencies.
They want an income that lasts for both their lifetimes and continues at 100% for the survivor, and they do not want their capital to vanish if they die early. Their bank's relationship manager has proposed a deferred annuity with a five-year deferment, claiming it pays '25% more every month' than an immediate annuity, so they should put the entire ₹68 lakh into it. A relative has warned them that annuities are irreversible and that the money is locked forever.
The Kulkarnis ask their agent which product, which option, and how much of the corpus should go into it.
1. Which annuity structure fits their situation, and why is the deferred option wrong for them?
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Immediate annuity, joint life and last survivor with 100% to the survivor, with a return-of-purchase-price option on whatever they annuitise.
- Their need begins now, not in year six. During a five-year deferment the household still spends ₹38,000 a month - about ₹22.8 lakh over five years. That money must come out of the same ₹68 lakh the deferred plan is supposed to protect, so the deferment consumes capital while paying nothing.
- A deferred annuity suits people with income in the gap years. Retirees with no pension and no other income are the wrong buyers.
- 'Joint life and last survivor' is essential: a single-life annuity stops at Ravindra's death and leaves Shalini with nothing. Naming her as nominee is not the same thing - the contract itself must be joint.
- Return of purchase price costs income (typically 10-20% lower monthly payout) but answers their 'we don't want the capital to vanish' concern and protects the survivor's estate.
- They should not annuitise all ₹68 lakh. Annuities are irrevocable, carry no surrender value and rarely allow loans. Keep ₹8-10 lakh liquid as the medical reserve and annuitise roughly ₹45-50 lakh.
2. Test the relationship manager's claim that the deferred plan pays '25% more every month' and is therefore better.
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Run the arithmetic before believing '25% more'.
Suppose the immediate annuity pays ₹100 a month per unit and the deferred one pays ₹125 from the start of year six.
| Period | Immediate | Deferred |
|---|---|---|
| Years 1-5 | 60 × ₹100 = ₹6,000 | ₹0 |
| Position at start of year 6 | ₹6,000 ahead | - |
The deferred plan is ₹6,000 behind on day one of year six. At ₹25 a month it needs 240 months - twenty years - just to break even, around age 86. And that assumes both are life-only plans; if the deferred plan has a return-of-purchase-price feature and the immediate one does not, the manager is comparing two different products.
A genuine five-year deferment has to compensate for five years of forgone income plus the insurer's compounding. At around 7%, ₹100 deferred for five years should become roughly ₹140, not ₹125. A '25% higher' quote on identical options is implausible; it is almost certainly comparing different payout options, an assumed bonus rate, or a plan with a different capital guarantee.
What the agent should demand in writing: guaranteed annuity rates per ₹1 lakh of purchase price, for the same joint-life, 100%-survivor, return-of-purchase-price basis, from both plans.
3. How should the ₹68 lakh actually be allocated, and what risks must be disclosed?
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Split the corpus by job, not by product.
- ₹45 lakh of fixed deposits at 7.1% produces about ₹26,600 a month of interest - below their ₹38,000 need, and the rate is not locked. Annuitising ₹45-50 lakh converts a fluctuating interest income into a guaranteed lifetime one, which is exactly what they lack.
- ₹8-10 lakh stays liquid (sweep deposit, liquid fund, or a dedicated medical deposit). This is not optional at 61 with no employer health cover - confirm they hold a separate health policy before locking money away.
- The ₹23 lakh equity fund should not be annuitised. Level annuities lose purchasing power: at 6% inflation, ₹38,000 buys what about ₹21,000 buys in ten years. Keep a growth sleeve, or choose an annuity option that rises about 3% a year and accept a lower starting payment.
- Consider laddering: buy an immediate annuity now for essential expenses and revisit a second purchase at 70 with the growth assets, when rates are better because life expectancy is shorter.
- Disclose in writing: no surrender, no loan, no early exit, the survivor continues only if the joint-life option is chosen at purchase, and the return-of-purchase-price benefit goes to the nominee on death, not to the annuitants.