Recently, I read an article in BusinessLine titled SBI Annuity Deposit Scheme: Why senior citizens must invest in it.
Its pitch is:
SBI Annuity Deposit Scheme could be an attractive investment for those seeking steady income after retirement
It describes further:
Coming from India’s largest public sector bank, the annuity deposit scheme works a bit like a loan EMI – only the roles of the lender and depositor are reversed here.
So, you deposit a lump-sum with the bank upfront. The bank, in turn, pays you a fixed sum every month. The difference between a regular deposit that pays monthly interest and the annuity deposit scheme is simple. A regular deposit pays only the interest periodically and returns the principal after the tenor is completed.
The annuity deposit, on the other hand, clubs both the principal and interest components and pays them an amount every month – much like how you pay an EMI on a loan.
While the article mentions that the principal gets paid out in the installments, it fails to clearly mention that after all the installments are paid out, there is no more money left. The payouts of an annuity is higher than a fixed deposit only because the principal and the interest is paid back each month.
If a senior citizen blindly invests all his savings in an annuity, then at the end of the tenure, there will be nothing left. Unlike a fixed deposit, he will not get back the principal because it has been already paid to him in installments.
If a financial advisor peddles an annuity more favourably than a fixed deposit without mentioning this important difference (like this article), then a gullible investor can expect a bitter surprise at the end of the tenure.
In a fixed deposit, the principal remains intact and can be re-invested by the owner. This cannot happen with an annuity.
An annuity is advisable only when the senior citizen has plenty of other money or income-generating investments.