Tata AIA Smart Annuity Plan Review – What are returns?

Let’s do a smart review of Tata AIA Smart Annuity Plan. Let us see if this is better than its peers in anyways? Plan offers guaranteed returns for lifetime. Generally most annuity plans offer similar feature. So what is smart here. Are returns better? Let’s see.

Annuity? what is it?

Just in case you are not aware, annuity plans are type of investment where you will get some pre agreed amount like pension for long duration. Though there are multiple options of annuity, most appealing is lifetime payout. This means you will keep getting fixed amount till you are alive.

Selling point for annuity is you know upfront how much you would get at the time of purchasing annuity. So provider (Tata AIA in this case) is guaranteeing to pay you specific pre agreed amount irrespective of market conditions, interest rates etc.

This is attractive for a section of people who feel comfortable knowing they will get X amount for long time and in many cases till they are alive. We have seen interest rates of small savings schemes and fixed deposits are falling. Annuity plans give such users to lock their money at particular rate for long time.

So even if rates fall by 2-3% over next say 20 years, they would still keep getting pre decided amount when they bought the plan.

At very high level there are two types of annuity plans:

  • Immediate Annuity – Here payout to you starts immediately after purchase of plan (generally from next year). Generally suitable for people who have retired or just about to retire. They can start getting regular income immediately.
  • Deferred Annuity – Here payout starts after few years as selected by customer while buying the plan. Generally suitable for people few years away from retirement. Say 45 or 50 year person expecting to retire at 60.

What are some of the features and options of Tata AIA Smart Annuity Plan?

To start with, this is a single premium plan. So you will need to invest entire amount at the time of purchase of plan.

Next you can chose from three options

  • Immediate Life Annuity – In this case, person will start getting regular income immediately on purchasing the plan. Payout would continue till person is alive.
  • Immediate Life Annuity with return of purchase price – In this case, person will start getting regular income immediately on purchasing the plan. Payout would continue till person is alive. Nominee will get premium paid on death of person.
  • Differed Life Annuity with return of purchase price – In this case, person will start getting regular income only after chosen period ( 5/10/15..years) after purchasing the plan. Payout would continue till person is alive. Nominee will get premium paid on death of person. Naturally amount paid will grow larger till payout starts and income would be higher compared to immediate plan.

One can select Single or Joint annuity. In case of later, payment would be made till any one of persons is alive. There are options to select regular income monthly / quarterly / half yearly or yearly

What are returns of Tata AIA Smart Annuity plan

Review of Tata AIA Smart Annuity plan is incomplete if we don’t talk about returns. So let’s see it’s IRR or Internal Rate of Return.

There are multiple options to chose from. For simplicity, I am taking few cases, just to give you feel of expected returns.

I have taken example of 50 Year Male as generally around this age, one would start thinking of annuity or pension. Let us say person would invest 10 Lac in this plan. I am assuming life expectance of 85 year.

First Case / example : 50 Year old Male. Single Life. Immediate Life Annuity. Payout mode – Annual.

If you see below, person would get 66,513 every year till he is alive. In our case assumption is life of 85 years. No return of premium of 10LacIRR or returns comes around 5.54%

Second Case / example : 50 Year old Male. Single Life. Immediate Life Annuity with return of premium. Payout mode – Annual.

If you see below, person would get 56,155 every year till he is alive. Of course yearly payout is low because we want premium back on death. In our case assumption is life of 85 years. Return of premium of 10Lac to nominee. IRR or returns comes around 5.50%. So you see not much difference if assumption of life expectancy holds true.

Let us see how it works out if person does not live up to age of 85. Let us see if returns change a lot in such cases. You can see below, IRR does not change much if person dies at age of 70 and premium is paid back to nominee. IRR is 5.30%

Third Case / example : 50 Year old Male. Single Life. Differed Life Annuity with return of premium. Payout mode – Annual. Deferred period is of 5 years. So person would start getting annuity after 5 years.

If you see below, person would get 77,588 every year till he is alive. This looks much higher than earlier plans. But don’t get fooled by number. If you see below, IRR is in fact only 5.57 %. You are getting higher payout because there is period of 5 years to grow your money and payout period is 5 years less. From 56 to 85.

Fourth Case / example : 50 Year old Male. Single Life. Differed Life Annuity with return of premium. Payout mode – Annual. Deferred period is of 10 years. So person would start getting annuity after 10 years.

If you see below, person would get 1,06,125 every year till he is alive. This looks highest than earlier plans. But IRR is in fact lowest 5.42 %. Higher payout amount is because of lower payout period is 10 years less. From 61 to 85.

So review tells us overall returns of Tata AIA Smart Annuity Plan are around 5.5% (if person lives till 85 years). Being Annuity plan, returns are taxed in the hands of individual. So do remember that aspect as well.

Before we move to conclusion, one more point. If you chose to select joint option, payout would continue till both persons are alive. Naturally payout period would be longer and so payout amount will be little lower. But rate of returns would still be more or less similar.

So chose option based on your actual needs.

Conclusion

Plan is simple to understand. We know what we will get upfront. This is a guaranteed return plan so naturally returns are low. But looking at similar annuity plans currently available, rate of return looks little better.

If you want to park your money with some fixed income product, you may consider this plan as one of the better options. Being annuity product, returns are taxed at the hands of individual. So payout will be considered as income. Keep that as well in mind.

If you decide to go for this plan, do try out few options using XIRR calculator in my other blog.

Link to Tata AIA Smart Annuity Plan Overview for your own research.

Happy reading & happy investing.

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