Plan a peaceful retirement

Retiring without adequate financial support to lean on can be a rather painful experience. High inflation has not just significantly pushed up your household monthly expenses, but healthcare costs too . With no long term investment products to provide a regular income for senior citizens, even those who have managed to build a retirement corpus may face difficulties.

One product that can deliver this benefit is an annuity. Star Union Dai-ichi Life Insurance (a joint venture between Bank of India, Union Bank of India and Dai-ichi Life) has recently launched its Life Reverse Mortgage Loan Annuity Plan. Investors requiring regular income can purchase this annuity plan by paying a lump sum. This plan provides lifelong fixed pension payments based on the initial investment and age.

If you choose to avail reverse mortgage directly from bank, you can raise a loan only for 10-15 years. After the tenure , you will have to repay the loan, failing which, the bank will sell the property and pay the proceeds after adjusting for the outstanding.

In case of the Star Union Dai-ichi Life Insurance, the insurer will tie up with the Central Bank of India, Union Bank of India and Bank of India for a reverse mortgage loan. Reverse mortgage is a product whereby a senior citizen can pledge his/her property to a bank, which in turn offers a lump sum amount in the form of a loan, to the insurer for an annuity plan. This loan amount is based on the age of the borrower, value of the property pledged and the interest costs.

The loan amounts to anywhere between 60-75 per cent of the property value . The advantage of the going through an insurer is that individuals can continue to stay in the property, without fear of having to repay loan during their lifetime.

Options offered

This pension plan gives you three options to choose from. Under the first option , lifelong annuities are paid at a constant rate to the investor. In the case of a joint arrangement, your spouse can continue to receive a monthly pension for life. After the demise of both investors, the policy will lapse without any surrender value. Under this option you receive a higher pension . The pension is payable based on the age of investor and the benefits increase with age.

With the second option, the investor receives pension all his life, after which his legal heirs are eligible to receive the initial lumpsum paid.

The third option involves an increase in the pension every year by 5 per cent (simple addition) with return of the initial lumpsum in case of the demise of the investor.

Besides the annuity, additional income by the way of a bonus is payable every year.

For instance, if the insurer earns an excess return of 6 per cent, 80 per cent of the excess return is paid as bonus to the investor by end of July every year. There is no surrender value under this scheme.

Once the option is selected no change is allowed at any point in time during the life time of the annuitant.

Eligibility

Senior citizens should own and occupy the flat or house that they propose to mortgage. The minimum age at entry for an individual is 60 years. In case of a married couple , either spouse should be 60 years of age and the other should not be less than 55 years of age. If the residential house is a joint property then the couple will be joint borrowers. The most important condition to avail a loan is that the title of the property should be clear, and .

Our take

The first two options described above appear beneficial. The third option of increasing the pension five per cent every year is not impressive because the rate of interest is less than four per cent .

The first option is apt for individuals not too keen on providing for their legal heirs. It is also more beneficial to an investor who anticipates longer life expectancy. For instance, if one enters this plan at the age of 60, with a purchase price of Rs 10 lakh, if he lives till 85 he could have earned pension to the tune of Rs 28.5 lakh. At the time of entry annuitant will get a return of 7.8 per cent and at 85 his returns rise to as much as 16 per cent. For those opting for the first option, it is advisable to split the sum into two equal parts. In the event of death of one partner, the spouse will continue to earn annuity.

Above 70 years

If you are 70 and above, and wish to leave a sum for our legal heirs, instead of opting for the option two, it's better to take reverse mortgage loan directly from the bank and deploy the lump sum in a fixed deposit scheme (currently banks offer interest 9.25 per cent for a term of 8-10 years) provided your life expectancy is 85 or less.

In the second option, the interest offered is 5.7 per cent at 60 and goes up to a maximum of 5.8 per cent.

The only disadvantage opting for a direct reverse mortgage is that the loans are offered up to a tenure of 15 years, after which you need to settle outstanding with interest, whereas in pension plan, the annuitant need not repay the loan in his lifetime.

In both cases, the interest income is taxable as per the individual's tax bracket.

Niggles

For regular transfer of pension to the annuitant account, the bank charges 5 per cent of the annuity.

The amount is higher for an electronic transfer.

At the time of entry the mandatory age difference between the life partners is an irritant.

Similarly, if the surviving spouse is not initially entitled to annuity, then he/she has to go through the process all over again.

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