Retirement represents a milestone in a person’s career, wherein after years of dedication, hard work, and perseverance at work, a person attains superannuation. This also marks the beginning of one’s life where an individual prefers spending quality time with loved ones and looks forward to fulfilling other wishes that had to be earlier put on hold whilst pursuing one’s career. However, the absence of a regular monthly income can put significant stress on one’s finances. What is therefore required is building a nest egg for a peaceful retired life.
Digital trends are moulding consumer expectations and demands, and also the way businesses operate. On the one hand, digital disruption in finance has become an unavoidable reality. On the other, what has not changed is the expectation of a steady stream of income by an individual to spend a peaceful retired life. Usually, retirees opt for an annuity plan of an insurance company; in policyholders provide the insurance company a lump-sum payment in exchange for a series of payments to be made in the future.
One such product, which marries the above two mentioned concepts of life is the annuity deposit scheme of a bank. Similar to an annuity plan offered by insurance companies, such a scheme enables depositors to make a one-time lump sum payment to the bank in return for fixed monthly payouts that comprise a portion of the principal amount and the interest on the diminishing principal amount. As a case in point, let us study the concept with the help of the Annuity deposit scheme introduced by the State Bank of India, the country’s largest bank.
The following are the key features of SBI E-Annuity Deposit Scheme:
The most attractive feature of an e-annuity deposit scheme is its ability to provide an assured payout for a fixed period. These payments are meant to replace the income one earned during working years, and they offer a sense of financial security. The individual deposit holder is able to plan one's post-retirement life based on the certainty of the installment payments. Further, the financial security provided by the State Bank of India is perceived to be at par with that of the Government of India.
The e-Annuity Deposit plan may suit those looking for a higher monthly receipt on their deposits while assuming a risk that is similar to that of a fixed deposit with the State Bank of India.
A retiree faces the risk of outliving one’s retirement corpus or finds oneself to reinvest after a drop in interest rates. As the annuity deposit scheme does not have a maturity amount, the individual does not run the risk of reinvestment. Such schemes are ideal in higher interest rate scenarios during which medium to long tenure investments can be made.
Since the payouts are equated in nature, one may plan the investment in the deposit in such a way that it aligns with one's post-retirement monthly expenses.
Considering the risk of inflation in the present low-interest rate scenario, it'll be beneficial for the individual to opt for a lower tenure e-Annuity Deposit, which, although it may provide a lower rate of return, may allow the individual an opportunity to reinvest at a higher interest rate upon completion of the tenure of the deposit. Moreover, a lower tenure also ensures a higher monthly payout in an equated monthly installment scheme.
Here is the rundown of the limitations of the scheme:
The e-Annuity deposit is different from a Recurring Deposit account. In a Recurring Deposit account, an individual deposits money in the bank in installments and receives a pre-agreed amount on the date of maturity.
The e-Annuity deposit also differs from a Fixed Deposit account. In a Fixed Deposit account, although the individual makes a one-time deposit, the maturity amount is received on the maturity date. The maturity amount may comprise of the principal and interest components in case of cumulative deposits or comprise of the principal component only in case of non-cumulative deposits as the bank separately pays the interest component at periodic intervals.
As opposed to Recurring or Fixed Deposit schemes, an annuity deposit scheme accepts a one-time deposit of money, and that amount is repaid to the deposit holder over a period of months through equated monthly installments over the tenure selected by the deposit holder.
The annuity deposit scheme offers most of the features that are expected from a retirement investment, viz. safety of principal, a reasonable rate of return, stable monthly income, liquidity, etc. Considering the pros and cons as discussed above, any retired individual may use the features of this scheme to one’s benefit.
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*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C apply.