Best Age to Buy an Annuity in India

Many retirees consider the best age to buy annuity between 55 and 65 years. People usually approach retirement at this stage, and they need a reliable source of monthly income. One can balance favourable payout rates and timely income generation when they purchase an annuity during this period. The availability of post-retirement income makes these investments an important component of retirement planning.

While many individuals ask ‘what is the best age to buy an annuity’, there is no single answer to this question. This is because, the decision to purchase an annuity depends on several factors like:

• Retirement objectives
• Financial commitments
• Health profile
• Life expectancy
• Availability of other income sources after retirement

People in their 30s and early 40s focus more on wealth creation for retirement. Long-term investment options generally offer greater potential for capital appreciation compared to immediate income products. If an individual converts a substantial retirement corpus into an annuity too early, it may reduce the scope of compounding.

Retirement planning becomes more structured in the late 40s and early 50s. At this stage, they tend to evaluate future retirement expenses. Individuals also estimate their monthly income requirements and evaluate how different retirement assets like EPF, NPS, investments, and pension income can cater to these needs.

Retirement planning tools like a pension calculator can help them estimate the guaranteed monthly income they would require after retirement. Investors can compare different scenarios before they choose an annuity based on their financial profiles.

Individuals with limited pension income, or those looking for greater certainty in retirement cash flow, often purchase annuities between 55 and 65 years of age. Those with sizable rental income or SIPs may slightly delay the purchase until the age of 65 or later, as indicative annuity rates are generally higher at this stage. Therefore, the answer to when to buy an annuity should be based on the overall retirement income instead of only one’s age.

The ideal age for annuity investment becomes easier to understand when an individual compares the indicative monthly payouts across different purchase ages. Annuity payout rates are generally higher for individuals who purchase it at an older age. However, deferred annuities purchased earlier benefit from a longer accumulation period before the beneficiaries start receiving their payouts. Therefore, considering only the monthly payout without any relevance to the overall retirement timeline can be misleading.

The following illustration assumes a single-life annuity with a return of the purchase price. The deferred annuities were purchased at ages 40, 45, and 50, with an assumption of the vesting age of 60. It shows the illustrative guaranteed additions during the deferment period. The actual annuity rates, guaranteed additions, and payouts may vary across different products based on the respective market conditions.

Note: The illustration assumes a hypothetical guaranteed addition during the deferment period for explanatory purposes. Actual guaranteed additions, where applicable, depend on the insurer and product terms.

Two crucial trends are visible from the above illustration. First, the annual annuity rate keeps increasing with age as insurers expect a shorter period of payout. That’s why, an individual buying an annuity at 70 years of age usually receives a higher monthly income compared to someone purchasing it at the age of 60, considering the same corpus.

People often tend to overlook the second trend. The deferred annuities purchased at younger ages may begin with comparatively lower payout rates. However, they benefit from a longer phase of accumulation before retirement. When it is combined with a longer payout duration after vesting, it can significantly increase the total lifetime income generated over retirement.

This comparison demonstrates why the ideal age for annuity investment cannot be determined by examining monthly payouts alone. Some of the equally important factors are the growth of the corpus during the deferment period, expected age of retirement, and duration over which the income is received. By combining all these variables, individuals can identify the best age to buy annuity.

Age is an important consideration when buying an annuity. However, investors may consider prevailing interest rate conditions while recognising that annuity rates vary across insurers and products. In reality, the best time to buy an annuity plan depends on:

• How a person is likely to generate retirement income
• What other financial assets are available
• Ongoing market conditions
• Future requirements for liquidity

While deciding when to buy an annuity, individuals must look at the following factors together.

Most people spend enough time to identify the best age to buy annuity. However, a few common mistakes can reduce the effectiveness of an otherwise well-planned retirement income strategy.

• Annuitizing the entire NPS corpus: Under the revised rules of the PFRDA, non-government NPS subscribers must annuitize only a minimum of 20% of the retirement corpus at normal exit. The 40% rule still applies to government subscribers. Individuals shouldn’t invest more than necessary, as it reduces flexibility.
• Waiting for higher rates: At times, investors delay the purchase as they expect better payouts. This could result in missing out on years of guaranteed income, even if annuity rates improve marginally later.
• Ignoring the Return of Purchase Price (ROP) option: If the beneficiary receives a higher payout, no residual income may be left for nominees.
• Treating retirement and annuity purchase as the same event: With deferred annuities, the income may start later, which offers greater flexibility in planning.
• Overlooking tax implications: The deductions under Section 80C apply only under the old income tax regime. Under the new regime, these benefits are not available. Therefore, individuals must assess the best time to buy an annuity plan after considering taxation.

The best age to buy annuity ultimately depends on the retirement goals and financial circumstances of an individual. One should consider the age that ideally aligns with their requirement for retirement income and long-term goals. Avoid the common mistake of evaluating annuities based only on monthly payout rates. Consider other important aspects like the retirement age, expected longevity, liquidity needs, taxation, and family responsibilities.

Before deciding when to buy an annuity, evaluate other investment plans, pension income, EPF and NPS benefits, and emergency fund requirements. Compare different scenarios using retirement planning tools to make a strategic decision to establish long-term financial security.