PFRDA

Factors Affecting Pension / Annuity Amount

Entry Age of an Annuitant and how it affects Annuity Size (Pension Amount)

Again to understand the factors that will impact the pension size we have to step into the shoes of the Insurer/ Annuity Provider. Effectively speaking the Insurer/ Annuity Provider is betting against the Annuitant’s Longevity- lesser is the payment period post commencement of the annuity, better is the situation for the Insurer/ Annuity Provider because the uncertainty and fluctuations with which the Insurer/ Annuity Provider has to deal with, will be low and for a lesser period.

Say, there is a world where every person will live up to 75 years. A person of 50 years in this world buys an Annuity such that he/she will be paid the annuity till the end of life i.e. 75 years. Similarly there is another person who takes the Annuity at 65 years and he/she will get the payments for 10 years.

For the first case, the Insurer/ Annuity Provider would need to make arrangements for making payments for 25 years; for any financial contract that is a very long time! In the second case the payment period for the company is 10 years, a long time but nevertheless less than 25 years of first case.

So, where should the Annuitant get a better rate?

Simple, second case where the payment period for the Insurer/ Annuity Provider is less!

Also, see the table in the section- How to Read an Annuity Rate Chart and Calculate Pension Amount. Pension amounts available increases as your entry age in the Annuity plans increases (read each annuity type row from top to bottom). There is direct correlation between the entry age and pension amount available- higher the entry age, higher is the pension amount.

Annuity plan type and how it affects Annuity Size (Pension Amount)

Yet again to understand the impact of the annuity plan type we have to step into the shoes of the Insurer/ Annuity Provider. For the Insurer/ Annuity Provider the best plan would be one where their payments are limited to the Annuitant only and after his/her death they get to keep the money (no Return of Capital/ Purchase price). Notice plan (i) - the plan has the best Annuity rates and hence Annuity/ Pension for all ages.

Plans where good annuity rates may not be available would be

annuity plans where there is return i.e. refund of the purchase price post death of annuitant/ spouse/ nominee,
plans where payment of annuity/ pension extends beyond the life of the annuitant i.e. pension is payable to spouse and then nominee,
plans where payment of annuity/ pension extends beyond the life of the annuitant i.e. pension is payable to spouse and then purchase price is returned to the nominee.

Other Factors affecting Annuity (pension)

Other factors affecting Annuity (Pension) are as follows:

Options added in the plan chosen- One gets the highest pension income (annuity) with the basic plan that covers only the Annuitant (plan (i)). Any options one adds (like annuity to spouse and/ or ROC to last survivor) only lowers the pension amount. That’s because the extra additions increases the cost of the Insurer/ Annuity Provider (Remember- always understand the annuity from the Insurer’s side!)

Gender- Women may get less money than men of the same entry age because they are expected to live longer.
Age of spouse- In case one chooses a plan in which the pension is payable to spouse, the age of spouse would also impact the annuity rate and the pension available.