Choose wisely – Annuity options for retirement

ideal retirement image

The hard-earned retirement corpus secured in accounts such as the NPS, PPF, and/or the EPF is the final nest egg for public or private sector individuals who retire after a few decades of continuous service. While certain central government retirees are eligible for pension and lumpsum fund benefits, almost all the private sector employees are not entitled to a pension from their employers and have to fall back on lumpsum (defined contribution plan) corpuses.

As a result, the post-retirement monthly expenditures of the family, most often, depends on corpus inwards from such accounts. There are two important considerations for such corpus inward for individuals – Safety and return on such corpus since this impacts the amount of derived pension on the same for the rest of the life.

Upon retirement, most individuals rely on traditional plans such as a combination of fixed deposits, Sr Citizen savings Schemes and/or plain vanilla Savings accounts to create cash flows for longer duration and this raises several risks of the safety of corpus, interest rate risk and thereby risk of variability of periodic cash flows and the possibility of hardships during retirement years.

Annuities – Should be the first choice for retirement corpus

Annuities should be the preferred choice for retired individuals; however, this product is not very popular due to lack of awareness, perceived lower rate of returns and liquidity issues. Annuities offer the best hedge against the variability of cash flows, against interest rate risks and consistent cash flows for most of the living life.

Today annuities offer a wide range of choices which were not available 5-10 years ago. Flexibility, market comparable rate of return, and wide range of options are available from over half dozen annuity service providers. Besides this, regulations and oversight of annuity providers make this product extremely safe as compared to other market-linked products.

A quick glance of the variety of options from annuity service providers is summarized as below.

Table 1: Choose the option wisely
Annuity for life Annuity for life with return of purchase price on death Annuity payable for life with 100% annuity payable to spouse on death of annuitant Annuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivor Annuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these pay-outs would be made to the subscriber’s mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant’s child/ nominee.
Source: NPSTRUST.org.in

 

Which option makes sense?

This depends upon a variety of factor and the retired individual’s objective, dependents, and other personal factors. For instance, for couples with no dependents the easiest choice would be to choose option 1: Annuity for life. Here, they are likely to enjoy higher cash flows or put in lower corpus to enjoy required cash flows. The standard of living could be higher for such couples since this option pays the highest pension as compared with other plans across annuity service providers. Options #2 and #3 might suit retired couple with legal heir (children / grandchildren) where they might want to gift such corpus earned.

Option #4 & #5 could severely impact the current cash flow for the retired individual since the objective is to return the corpus. Unless there is adequate liquidity and other assets these options defeat the very purpose of buying an annuity and therefore can be avoided.

FAQs on EMI Moratorium – Most questions answered

The EMI Holiday package announced by RBI on account of CoVID19 has raised many questions with respect to applicability, coverage, eligibility, and impact.   We answer the basic questions through the FAQs that are put together which cover most of the doubts regarding these. 

  • Is moratorium compulsory or optional; what loans are it applicable to?

The moratorium is optional both for the borrower and the financial institution(lender).  ie The lender can choose to offer this option to its clients. The borrower can also choose to avail of the option if it is offered by the lender from whom the loan is taken.  

This is applicable for all kinds of credit facilities such as retail loans, Home Loans, Business Loans, Cards and Farmer Loans, term loans, and working capital loans of any size and duration and applicable both for individuals and businesses.

  • What is meant by moratorium?

A moratorium is temporary postponement of payment of interest/ principal/installments (and is not a waiver) for the period from Mar 01, 2020, to May 31, 2020. Interest will continue to be payable on all amount(s) for which payment is being postponed pursuant to the Moratorium.

  • For what period can the moratorium be granted?

A moratorium may be granted up to a period of three months for all amounts falling due between Mar 01 and May 31, 2020.

  • Is the moratorium on principal or interest or both?

The moratorium can be offered for below payments due during the moratorium period:

  1. Principal and/or interest component
  2. Bullet repayment
  3. Equated Monthly Instalments ( EMIs)
  4. Credit Card dues
  • Will the interest accrue during the moratorium period?

Yes, lenders will charge interest during the moratorium period as per the relevant terms and conditions of the loan agreement between the lender and borrower/s.   

  • How can you opt for the moratorium?

For most PSU lenders, there is blanket access to the moratorium, and it applies to all loans irrespective of size/category/sector. For private lenders, it would be prudent to get in touch with the respective client relationship manager/branch/phone banking/mobile banking/internet banking etc. and communicate your preference since this is NOT a default option and needs to be availed categorically. Failing which, there is a chance that the deduction of EMI would go through on the scheduled date set.

  • What is the interest charging mechanism for retail term loans such as Home Loans, Personal Loans, Consumer Durable Loans, Two-Wheeler Loans, Auto Loans?

The accrued interest would be added to the principal amount which will increase the residual tenure of the loan except in cases where extension of tenure is not possible in which case the EMI amount will increase. Please refer to the terms and conditions in the loan agreement for further details.

Illustration: Mr Ravi availed of a home mortgage on Mar 01, 2020 amounting to Rs one crore with a loan tenure of 240 months at an interest rate of 7.5%. If Mr. Ravi wants to avail of a moratorium of installment of Rs 89,972 which is due on Apr 01, 2020, then the interest for the month of March amounting to Rs 75,000 will be added to the principal amount and the outstanding principal amount on Apr 01, 2020, will become Rs 10,075,000. The interest will be computed on an outstanding principal. Similarly, the interest for the month of April which is payable on May 01, 2020, of Rs 75,562 will be added to the opening principal on May 01, 2020, which will be Rs 10,150,562. The interest will again be computed on the outstanding principal. In this case Mr Ravi’s tenure will increase from 240 months to 250 months considering the unchanged rate of interest and installment amount during this period.  To reduce this, Mr Ravi can choose to prepay part of the loan when normalcy returns to his cash flows, based on the prepayment clauses in his agreement.

  • How will interest be charged and recovered for SME / MSME / Businesses which use cash credit/ overdraft facilities? 

The accrued interest will be due and payable immediately after the end of the moratorium, and interest keeps accruing for this moratorium period.

  • Will there be late payment charges/ default interest/ additional interest for the deferred installments during the moratorium period?

No late payment charges/ default interest/ additional interest shall be levied during the moratorium period has to be charged during this period as specified by RBI.

  • Can the borrower make payments in between the Moratorium period?

This option to defer payments on loans is a relief granted to borrowers due to disruption caused due to the unprecedented outbreak of COVID-19. However, the borrower has the option to continue scheduled payments during this moratorium; or avail of the benefit of the Moratorium.

  • Will the seeking of Moratorium by the borrower have an impact on their credit/bureau score?

The moratorium on payments will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs)/credit bureau by the Bank. Hence, there will be no adverse impact on the credit history of the borrowers. This is specifically for this moratorium period only.

  • If the borrowers have enough balance in the accounts and installment is due, will the lender debit the EMI during this period?

Yes, if you have NOT opted in for the moratorium, then the normal EMI dates would apply and the deduction would occur as per the loan schedule.  It may be noted that some banks are offering moratorium as a default, hence, it is advisable to check with the communication from the bank. However, if one has opted for the moratorium, then the EMI would not be deducted even if there is sufficient balance for the EMI. 

  • Does the borrower need to submit any documents for availing this Moratorium? 

For PSU lenders the default option is the borrowers would get this moratorium irrespective of which category he belongs to. For borrowers of private lenders, the borrowers would get instructions from his/her respective lender on what needs to be done. Currently, the paperwork is limited to communicating the choice of option to the lender via – email /phone banking/internet banking or branch banking.

  • Does it make sense to continue to pay the EMIs rather than availing of the moratorium? 

Yes, if there is NO pressing need or shortage of cash flow then it makes sense to continue to pay as per schedule. This way you save on the additional interest that would be charged on the amount outstanding.

  • What happens to payments due and made or defaulted in March 2020 

If the payment has been made during the 1st March 2020 – 31st March 2020 period, then the borrower will effectively get two months of the moratorium period. If there has been a default due to cash flow issues or any other reason, then you would now get protection against any penalty/charges that might be due or have been deducted. And effectively such borrower would get the 3-month moratorium period. 

  • What happens to loans/credit facility started in March or April 2020?

The borrowers of all classes, old and new are eligible to avail of this moratorium; however, different lenders might have different rules, so it might be good to check with your lender on their policy with respect to the same.

  • If the borrower has multiple borrowing facilities within the same lender of different lenders, can he/she get a blanket moratorium? 

The borrower needs to specifically select and mention every facility that he/she has availed from the lender or in case of multiple lenders, then the borrower will need to communicate/opt with all such lenders.

EMI Loan Calculator and Impact Assessment

How do I make money quick on markets?


Watch expert Financial advisor – Anil Rego, Founder and CEO of Right Horizons Financial Services give his views on making quick money in the market.

– Get Rich quick – Lose it quick.
– What is great about the market is that in the long run it delivers well.
– Speculating can also result in quick money.

Follow us on:

Facebook : https://www.facebook.com/Righthorizon…

LinkedIn: https://www.linkedin.com/in/right-hor…

Twitter : https://twitter.com/Right_Horizons

Whatsapp : +91 91480 96684

Call: +91 98453 99780

Review Your Portfolio Before Investment Decisions In A Bear Market

Vinay’s portfolio has taken quite a beating. He had purchased YES Bank at a price of around Rs. 450 per share about 8-9 months back. Today the share is hovering around Rs. 168. Sintex Plastics, which he had purchased in December 2017, has lost about 60% of its value. His portfolios largely comprised of midcap stocks, have lost 40-60% value from their peak. His stock portfolio was doing very well at one point, based on which he significantly increased his investments into stocks. Now, he is unsure as to what to do. Should he buy more of the stocks that he has so that his costs can be averaged?

The stock market has seen quite a few crashes this year. It is highly volatile these days and in a bear phase. The mid and small cap indices lost between 25-35% in a short period. In a bear market, confidence is low and stock prices are not rangebound. They can swing wildly.

In case you are in such a dilemma, here are some action points to bear in mind before making a random or emotional decision –

Review and Adjust Your Portfolio

Its ideal to book profits on your portfolio and hold some cash for deployment on market falls.  You may still want to review the stocks and equity mutual funds in your portfolio so as to remove the duds. You might want to let go of the duds in your portfolio by taking advantage of bear market rallies.

If you have stocks that were bought because of tips, recommendations or just to make quick profits, review them and sell off those that do not seem to have the potential for giving good returns in the long run.  Look to buy good stocks that can gain strongly on a market recovery.

Avoid Panic Selling

Some of us panic and sell off stocks the moment we see that they are losing value. That may not be the best course of action for all stocks. It is not a good idea to exit quality stocks with a good long-term record and good cash flow, , especially at points when they have fallen sharply and their valuations become attractive again.

Don’t Miss Out On Buying Low

Averaging is a smart investment strategy, especially for diversified mutual funds and exchange-traded funds. Systematic Transfer Plans are good to supplement your SIPs when markets have fallen; and you are unable to predict the bottom of markets, but you know it is somewhere around the corner.

Most investors become too fearful on large market falls and miss out the opportunity of buying stocks at their best prices.  Keep in mind that the news flow is likely to very negative at such points.  At the same time, don’t fall into the trap of getting in too early. You can add more of blue chip stocks, high quality funds and ETFs when the prices are down.

Be Practical

If you don’t have the time or find it difficult to track individual stock and the market environment, stick to mutual funds. Seek professional advice if required.  Understand your portfolio, risk tolerance and risk capacity, so that you do not make any hasty decisions that you might regret later on. Work on a disciplined investment style that suits you.

It is difficult to time the market. So investors have to be patient and keep the right investment perspective before making decisions.

In the current market scenario, the prices have fallen quite a bit. It may be time to take some positions slowly. For example, one can invest in blue chip equity funds such as Mirae India Equity and Aditya Birla Sunlife Frontline funds in a phased manner, especially on corrections. One can use a combination of lump sum investment and SIPs to average the costs. When the markets move upward, they can sell off some positions and use that money to invest in debt instruments.

Key Takeaways

    • Understand your risk tolerance; Use an investment style that suits you
    • When markets are volatile, review your portfolio and sell off the bad quality stocks
    • Don’t Panic . Take advantage of market volatility
    • Stay Invested for the long term in fundamentally good stocks, mutual funds and ETFs. Increase allocations on lareger market falls.

Market: 2k18 “The year gone by”..

2018 was one of the most difficult year for investors as benchmark Nifty gave only 3.2% whereas broader markets like Mid cap and Small caps where down by 15.3% and 23.6% each  respectively. Only Bankex, FMCG and IT are closed on a positive note, while rest all indices closed lower. The markets also witnessed major events like NPA clean-up, NBFC re-financing issues, RBI Governor exit, that could fundamentally change the structure of the economy. It is however important to highlight that the government proactively acted on the above issues.

Where do we stand today:

Data throws up a mixed bag when we look at valuations and compare it with December 2007, closer to the previous market peak.  On Price/Earnings for Nifty 50, we are valued similar to the last peak at 26.6 in Dec 07 Vs 26.4 in Dec 18, but when we look at other valuation parameters like Market Cap/GDP, we are much lower.

As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

//(GDP & GNP Definition and the difference

GDP is the total market value of goods and services produced within the borders of a country.

GNP is the total market value of goods and services produced by the residents of a country, even if they’re living abroad. So, if a U.S. resident earns money from an investment overseas, that value would be included in GNP (but not GDP).

Further, markets have steep falls when they run up significantly and the economy is overheated.  Despite the fact that markets have moved up over the last couple of years, this is much muted compared to what you normally see in a bull market.  Economic parameters are also muted.

Various Indicators- Current Vs Dec 07

US Markets take a tumble

US markets have seen a large correction since October 2018 with the DowJones was down by 18.8% before recovering some of the losses. Though the US markets have been one of the best performers, we are relatively bearish on US stocks vis-à-vis Indian stocks. In the case of the US, both market and economic performances have been strong over the past few years and we believe US stocks/ESOPs could be impacted over the next year.