Consider this if you are plann...

Even decent investment products can be mis-sold.

How?

Better explained with an example. A Nifty index fund is a low-cost equity product. Difficult to find flaws. However, if it is sold as a short-term investment for a goal 2 months away, it is mis-selling.

Note: This post is for education and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The products quoted are for illustration only and are not recommendatory.  Read and understand the product terms and conditions and consider suitability before investing in any investment product.

Came across a similar issue with an annuity product from a prominent insurance company.

Annuity plans from insurance companies can be useful income products provided you buy the right variant at the right age. You can lock in the interest rate for life. You can’t do that with any other investment product. You can stagger annuity purchases to increase income and reduce risk during retirement.

An investor received the following message.

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Good News!! You wanted it & we have revised our deferred annuity rates only for you. You can now get a guaranteed 12.3 % annuity with a one-time contribution. Invest Rs 1cr once & get Rs 12,28,634 p.a. for life + Return of investment in ICICI Pru Guaranteed Pension Plan – Deferred Annuity.

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These days, when senior citizen bank fixed deposits are yielding 7-8% p.a., guaranteed 12.3% p.a. for life is an excellent return.

But there is a catch.

And it is not difficult to see where the catch is

The promotion is for a deferred annuity plan.

There are two types of annuity plans.

1. Immediate annuity plans: Pension income starts right away. LIC New Jeevan Akshay is a popular product in this space.
2. Deferred annuity plans: The pension income does not start right away. It starts after a few years. LIC New Jeevan Shanti is a popular deferred annuity plan.

It is clearly mentioned in the message that the plan is a Deferred annuity plan.

If you invest Rs 1 crore and start getting Rs 12 lacs from the first year until demise (and the family gets back the purchase amount in the event of demise), then you can say that the return is 12% p.a.

However, if you invest Rs 1 crore but the pension income for life starts after 10 years (the family still gets back the purchase amount after investor demise), then the return is obviously not 12% p.a.

Let’s see how.

Let’s say you have Rs 1 crore, and you invest in a product that offers 6% post-tax. In the next 10 years, this corpus will grow to Rs 1.79 crores.

For a corpus of Rs 1.79 crores to generate an income of Rs 12 lacs per annum, you need a return of just 6.7% p.a. And this 6.7% can be pre-tax (since annuity income is taxable).

So, we are talking about returns of about 6-7% all the time. And you can earn a similar return in a bank fixed deposit too.  Where is the 12.3% that the promotion mentioned?

Note: With bank FDs, you can’t lock in interest rates for life. Hence, not exactly an apples-to-apples comparison.

Mentioning 12.3% is a trick to attract investors. And the insurer knows it. Yes, you get 12.3 lacs per annum on investment of Rs 1 crore but this income starts after 10 years. What about the time value of money?

*Annuity purchases are subject to GST of 1.8%. Hence, while your pension income is calculated on Rs 1 crore, you will have to pay Rs 1 crore + 1.8% = Rs 1.018 crores